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God's Politics

‘Vulture Funds’ Circle Zambia by Muyatwa Sitali

Sojourners’ August issue highlights the problem of the crushing debt burden borne by many poor countries. While the global Jubilee movement has won some significant victories, some of this progress has been threatened by a new trend: “vulture funds,” private companies that buy heavily discounted debt and then sue impoverished nations for the full face value. British Prime Minister Gordon Brown has called vulture funds “morally outrageous,” but last June’s G-8 meeting of wealthy nations did nothing to change the international legal framework that vulture funds exploit. Below, Muyatwa Sitali, of the Jesuit Center for Theological Reflection in Zambia, describes how one such vulture swooped in not long after creditor nations and institutions such as the IMF had cancelled over 80 percent of Zambia’s debt to them.

Zambia was just beginning to benefit from the debt cancellation initiatives of rich countries and multilateral financial institutions [such as the IMF]. Then Donegal International, a commercial debt collector headed by Michael Sheehan and registered in the U.S. but nominally based in the British Virgin Islands, sued Zambia for $55 million in a London court; Donegal had bought the loan from Romania in 1999 for only $3.3 million. By the time of the litigation in 2005, Zambia had already paid Donegal a total of $14 million.

Mr. Sheehan and his company have joined the ranks of vulture funds because of their insatiable appetite for money—money that would have otherwise helped alleviate the disease and poverty that affect close to 7 million people in Zambia.

Such activities of commercial creditors, and the apparent lack of legislation in countries that host such companies and their proprietors, make it hard to forsee a global partnership [to fight poverty], such as that envisaged by the Millennium Development Goals.

In April, a London court ordered Zambia to pay Donegal International over $15 million, even though the judge highlighted immoral conduct by Mr. Sheehan and his accomplices. This means that some projects aimed at alleviating poverty will not be undertaken this year. With meager reserves at the Central Bank, Zambia’s ability to sustain its debt burden is threatened, and the prospects of meeting the Millennium Development Goals are at risk. For Zambia, $15 million translates to over 60 million Zambian Kwacha, which would be enough to facilitate 3 private manufacturers of animal-drawn plows and other equipment appropriate to and affordable for small-scale farmers (to complement the tractors for which Zambia originally got the 1979 loan from Romania).

Donegal International’s profiteering stands in the way of national development. Its “vulture fund” activities need to be curtailed.

Muyatwa Sitali is acting coordinator of the Debt and Trade Project at the Jesuit Center for Theological Reflection in Lusaka, Zambia.

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posted August 14, 2007 at 1:06 pm

And how exactly is it worse for Donegal to try collect on Zambia’s debt than it would be for the Romanian government?
The report was vague on what Donegal did that was unethical. Jubilee’s report indicates that the judge admonished them for “dishonesty”, but the fact that they won any sort of judgement and were not accused with perjury suggests that their misconduct may not have been particularly severe.
Which leads me to ask: is Zambia taking steps to reform itself, or is someone trying to make Donegal into the heavy to draw attention away from corruption and ineptitude in the Zambian government?

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posted August 14, 2007 at 5:18 pm

Would allowing these states to default on their loans raise or lower their credit with potential investors? My guess is lower.
With lower credit, how are these nations supposed to build infrastructure or other public goods? If there is no accountability on the state financially, what holds them accountable ethically?
While it might be sweet to forgive a friend their debt, and even an enemy, does that directly correlate to good (sic) nations forgiving the debt of others?
And if nation A has lent the money of its citizens to the inhabitants of nation B, don’t the citizens of A have a right to their own money?
This isn’t just about being forgiving, it is much more complex.

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Al Shaw

posted August 14, 2007 at 5:31 pm

This is obviously a little-understood issue. How about a Sojo-led education program (maybe with Jubilee 2000) to explain and highlight this issue?
I smell a rat – but we need to understand it before we can kill it.

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Paul Aarden

posted August 15, 2007 at 2:49 am

A sad state of affairs indeed,it is indeed much more complex than mere forgiveness, which is a part of it though. I live in Africa and see what happens here aplenty.
The previously lent amounts were plundered in part and the present amounts still appear to be somewhat thinly spread – it’s an age-old problem which won’t go away – not sure quite what the solution is, the disparities on the continent are massive and don’t really appear to be eroding at any great rate. Mankind appears unable to deal with wealth very intelligently in the global sense, money (or mammon) certainly is the god of this world.
Quo vadis? Time alone will tell I suppose.

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posted August 15, 2007 at 10:01 am

“And how exactly is it worse for Donegal to try collect on Zambia’s debt than it would be for the Romanian government?”
How is it worse? Zambia had a deal in place with the Romanian government to liquidate the entire debt for $3.28 million. Before that deal was completed, Donegal’s group came in and trumped that offer – offering the Romanian government more than Zambia had to acquire the debt.
Instead of Zambia being free and clear, they were sued by Donegal for the full debt amount and had paid $14 million (more than four times what they were almost able to pay to eliminate the entire debt) before beginning to miss payments.
Romania’s culpable too for selling to the highest bidder (rather than doing right by an impoverished country), but that’s what’s wrong, Wolverine.

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Ted Kraynick

posted August 17, 2007 at 4:46 pm

As jurisnaturalist said, the citizens of country A produced the money to begin with. How solvent of a country is Romania, or was, when it made the loan? There are a lot of variables here. Perhaps Romania found they could not do without the money they had sent to Zambia? If that was the situation it would have been prudent for Romania to sell the Loan. However as Josh points out, Romania did not have to sell to the highest bidder. Instead, to be a good global neighbor, Romania should have sold the loan notes in a manner that would not have unduly punished Zambia in the financial markets. Actually, Romania is more at fault than Donegal. Donegal made a deal that Romania could have freely chosen to refuse. Romania should have sold the loan to some “non-vulture” buyer to help honor their original deal with Zambia.

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Djunga Shango

posted September 20, 2007 at 9:24 pm

Read the judgment. Donegal spent three years making investment proposals to convert the debt into local currency at a discount and to bring in new investment. Debt conversion has been used by lots of NGO’s including UNICEF… The real reason Donegal was targeted was that they were suspected of supporting the political opposition in Zambia because their local rep was a prominent member of the opposition… This is an old story in Africa and unfortunately a lot of people are believing the party line on this…

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