Chasing away debt vultures
Digging into the laws needed to make private lenders provide their fair share of debt relief
Right now, groundbreaking legislation is being debated in New York that could force private sector lenders to grant debt relief to poorer countries struggling with debt crises. This is a battle like that of David and Goliath. The basic needs of the world’s poorest people are being pitted against the greed of vulture funds. And the fight is ongoing.
The New York debt bill in numbers
Blowing up the debt balloon. In the last three years, external shocks like the COVID-19 pandemic, food and fuel price spikes, and rising interest rates, have caused the public debt of poorer countries to balloon. Three out of five low-income countries, and around twenty middle-income countries, are on the brink of a debt crisis.
Click on the map for an interactive version. Data is available only for low-income countries.
Debt and austerity fuel inequality. In 2021, low- and middle-income countries were spending an average of 27.5% of their national budgets on debt repayments — more than they could invest in education, healthcare and social protection combined. It’s families living in poverty, women and girls, and marginalized groups who pay the highest price for this austerity.
World leaders recognize the problem. But the ‘Common Framework for Debt Treatment’ launched at the G20 two and a half years ago has been awfully slow and has not delivered. The main holdup? Disagreements among creditors over sharing the debt relief effort. And while this has mainly been rich governments haggling among themselves so far, the challenge of bringing private creditors into the tent is just around the corner.
What happens in New York – and London – really matters to Global South countries. Over half of the foreign debt of low- and middle-income countries is owed to private bondholders and banks. About half of that debt is contracted in New York; the other half in London. So, if a government defaults on their sovereign debt, private lenders can sue them in New York or London. And typically they win. The resulting legal battle can shut off governments from international financial markets for years. Argentina, for example, had limited ability to borrow for fifteen years after its 2001 default.
This leaves poorer country governments stuck in a vicious cycle. They are reluctant to default on private debt, so they default too late, get too little debt relief, and are forced to muddle on saddled with unsustainable debts.
Meanwhile, rich private creditors are getting richer. With asset managers charging sky-high interest on loans and refusing to grant the country debt relief during the pandemic. And when the occasional default arises, they typically get a sweeter debt restructuring deal than rich government creditors. It’s heads private investors win, tails taxpayers lose.
And the vultures circle. So-called ‘vulture funds’ abuse the system by buying debt on the cheap when financial markets expect a country to default. They then sue for the full face-value of the debt, enabling them to make super profits. Caribbean-based Hamilton Reserve Bank is not even waiting for the outcome of negotiations to restructure Sri Lanka’s debt. They are already suing the country in New York, and want Sri Lanka to pay the equivalent of 15% of their annual education budget.
Scope for hope
But there is a ray of hope. The New York debt bill would require private creditors to grant as much debt relief as the US government, which aligns itself with other governments. It was approved by the New York State Assembly Judiciary Committee last month. Although it doesn’t seem likely that the bill will pass during the current New York legislative session – which ends next week – this is a momentous step forward that offers hope for the future.
And more hope across the pond. The New York bill is based on a 2010 UK law, which was limited to some debt restructurings underway at the time. But today a campaign is pushing to extend this law indefinitely.
Something to read, listen to, watch
Watch the premiere of the feminist cabaret play ‘Drowning in debt’ for something a bit different.
Read about how activists are dubious about big business promises to tackle inequality.
Listen to Reasons to be Cheerful with Ed Miliband and Geoff Lloyd asking if people and planet really come before profit?