IFI governance


Stopping vulture funds through national anti-vulture laws

6 October 2016

6 October 2016 | Minutes

Sponsors: CNCD11.11.11


Gwenaelle Grovonius, Member of Parliament for the Parti Socialiste (Belgium)

Gerhard Schick, Member of Parliament for the Greens in the Bundestag (Germany)

Eric LeCompte, Jubilee USA

Antonio Gambini, CNCD 11.11.11 (Belgium)

Jürgen Kaiser, Erlassjahr (Germany)

Tiago Stichelmans, EURODAD



Gwenaelle Grovonius

  • Issue in Belgium derived from public outrage – leading to probably first anti vulture fund in the world – due to attempts by private creditors to appropriate assets financed by Belgian official development assistance. Subsequently a law was developed in UK related to HPIC countries; these led from civil society campaign
  • This issue not limited to developing countries – not just Argentina – but also in Greece. A €4 billion holdout fund in Greece is to this day being paid in full
  • This led to Belgian parliament voting in 2015 to limit the rights of the creditor to be repaid only a limited amount, if seeking to use an illegitimate advantage, based on a manifest dissonance between how much was paid for the debt and how much is being claimed.
    Additionally, that the debtor was insolvent or in imminent risk of being so, that the creditor is in a tax haven, that the creditor refused to participate in a debt-restructuring agreement, that the debtor has used the weaknesses of the creditor to negotiate, and that the repayment would have a significant impact on the state’s finances and impact on the economic and social welfare on its population
  • This has been constitutionally challenged in Belgian court, Belgian NGOs have joined the legal battle
  • IMF is mandated to safeguard financial stability and promote growth and welfare – its mandate should lead it to support laws such as the Belgian law and advise other countries

Tiago Stichelmans

What are vulture funds?

  • Vulture funds’ existence is permitted by the absence of a framework to deal with restructuring when a state is bankrupt.
  • States have to confront a multitude of creditors
  • Restructurings organised by states are voluntary, allowing creditors to refuse to participate and jeopardise the whole process including by providing an opening to vulture funds
  • VFs buy debts on the secondary market, so not from the state as a creditor, and if in a tax haven, they can do so anonymously
  • They buy debt in the knowledge that the state cannot repay the debt, but they speculate that most creditors’’ will accept restructuring – giving it the capacity to subsequently reimburse the full value of the debt which the vulture funds seek by suing the state, demanding also interest, penalties and legal fees
  • They often win, and even up to 20 times their original investment

What are the implications of their activities?

  • Since VFs usually win, their activity jeopardises state restructuring
  • Hence restructuring is discouraged for all creditors,
  • Restructuring becomes more costly and slower, and risk more costly debt crises
  • States’ investment in development is compromised, as money is diverted to VFs

What are the available solutions?

  • This is why an international mechanism for debt restructuring

Jurgen Kaiser

  • Need to have mechanisms to bind dissenting creditors in order to deny space for vultures to litigate.
  • Recall many of the first cases were not to do with bonds, e.g. Donegal vs. Zambia which was about an official loan from then-socialist Romania
  • $2.6 billion currently exist on 36 HPIC countries by non Paris club creditors that should have been cancelled. Currently these debts are not being served
  • Mozambique is a cause for concern, particularly regarding the recent gas field discoveries – perhaps drawing in vultures now to exploit old debt to appropriate future income
  • The reliance on collective action clauses can help in future but cannot address such old debt
  • Currently the Paris club seeks to impose that no creditor cannot demand better terms than Paris Club
  • We have a theatre of creditor responsibility demanding debtors’ abolish non Paris debt, but without any mechanism to support the debtor to do so – leaving the debtor with all the burden and all the risk

Eric LeCompte

  • National Laws are important
  • IMF paper noted that CACs – should they fail to address problems such as those following Argentina (but prior to the decision) – would also need changes to laws in financial jurisdictions

Gerhard Schick,

  • Focus on German debate; Germany voted against debt resolution mechanism at UN
  • In recent years, beginning with the Greek question in 2010 the issue of debt has been moralized in Germany – relating it to guilt that has to be redeemed at any cost
  • It is a little bit weird, as of course in the private sector a debt resolution mechanism exists for companies etc.
  • For governments, the German position has been radically and overwhelmingly moral
  • Specalised law firms exist to exploit tax law – the idea is to not be tax efficient, but to use tax laws as if they were a gold mine to make money.
  • Currently there is a parliamentary probe into dividend arbitrage that seems to be similar to theft – by seeking a tax refund to which they were e not entitled.
  • hence tax problems are not just evasion or avoidance, but an unrelenting effort to capitalise. Similarly we see free riding in these forms of exploitation of the investment system where no service is provided and is good for almost nobody, especially it exploits responsible creditors
  • Hence a country like Germany should participate in such an activity – we are not home to vulture funds. The moralism and the lack of understanding to protect decent actors in markets has led to a situation of lack of awareness of the behavior of market participants
  • In the Bundestag we have had hearings – but in the current coalition government treaty there is no mention of the vulture fund problem (as opposed to the previous discussion).