Stop ‘vulture funds’ from paralyzing debt-relief efforts, says UN independent expert

As an Argentinian ship remained impounded in Africa in a debt-repayment dispute involving a creditor Argentina calls a ‘vulture fund,’ a United Nations independent expert called today for checks to be placed on the power of debt holders that buy obligations at a deep discount, then demand repayment in full.

Also using the term ‘vulture fund,’ the UN Independent Expert on foreign debt and human rights, Cephas Lumina, asked world governments to prevent such entities from being able to “paralyze debt relief for heavily indebted countries,” according to a news release from the Geneva-based UN Office of the High Commissioner for Human Rights (OHCHR).

The release noted that the impounded Argentinian naval vessel has been held since 2 October in the Ghanaian port of Tema on the basis of a court order obtained by what it called the ‘vulture fund’ NML Capital Limited, a Cayman Islands-based subsidiary of the US investment firm Elliott Management Corp.

While market practitioners prefer to refer to such funds as ‘distressed debt’ or ‘special situations’ funds, media reports have said NML Capital is one of the main holdout investors that purchased Argentine debt at a discount when the country’s economy was in freefall in 2000.

“Successful debt restructuring for deeply indebted countries will be made impossible if vulture funds are allowed to paralyse debt relief,” said Mr. Lumina.

“Vulture funds such as NML Capital should not be allowed to purchase debts of distressed companies or sovereign States on the secondary market, for a sum far less than the face value of the debt obligation and then seek repayment of the nominal full face value of the debt, together with interest, penalties and legal costs, or impound assets of heavily indebted countries in an attempt to force repayment,” he added.

Mr. Lumina recalled that NML Capital won a case against Peru in 2000, recovering many times what the fund paid for the country’s distressed debt.

According to media reports, the fund spent almost four years in the courts to win a ruling that forced Peru to settle for almost $56 million on distressed debt the fund had initially bought for $11.8 million.

Mr. Lumina said NML Capital had refused to participate in debt restructuring offered by Argentina, adding that a “majority of creditors accepted a repayment at a lower nominal value of sovereign debt, enabling Argentina to recover economically.” The expert cited the lower repayment value as being 30 per cent, while some media reports add that currency fluctuations mean the Argentinian offer was around 51 cents on the dollar.

In line with his mandate to assess the impact foreign debt can have on a country’s ability to uphold human rights, Mr. Lumina said that “reduced debt burdens and increased fiscal capacity contribute to the creation of the conditions necessary for the realization of all human rights, particularly economic, social and cultural rights.”

Mr. Lumina additionally expressed his concern about the continued impounding of the Argentinian navy training vessel ARA Libertad, a three-masted tall ship

The International Tribunal for the Law of the Sea, established by the UN Law of the Sea Convention to adjudicate disputes over its provisions, is expected to announce a decision on the case between Argentina and Ghana on 15 December, OHCHR noted.

Mr. Lumina urged States to follow the example of the Channel Island of Jersey and the United Kingdom, which OHCHR said had recently adopted legislation that aims to prevent vulture funds from pursuing excessive claims against heavily indebted countries before their national courts.

Norms contained in the UN Guiding Principles on Foreign Debt and Human Rights, which the Geneva-based Human Rights Council endorsed in June, underscore that “States, international financial institutions and private companies have an obligation to respect human rights, including the duty to refrain from formulating, adopting, funding, and implementing policies and programmes that directly or indirectly contravene the enjoyment of human rights,” OHCHR said.

According to the principles, loan agreements should “impose clear restrictions on the sale or assignment of debts to third parties by creditors without the prior informed consent of the Borrower State concerned.”

They add that “every effort must be directed towards achieving a negotiated settlement between the creditor and the debtor.”

The principles also state that “creditors should not sell sovereign debt on the secondary market to creditors that have previously refused to participate in agreed debt restructuring.”

According to media reports, Argentina’s late 2001 default on $100 billion of debt was, at the time, the biggest default in history. Argentina’s total public debt currently stands at around 40 per cent of the country’s Gross Domestic Product after standing at 160 per cent before the default, OHCHR said.

Special rapporteurs, or independent experts like Mr. Lumina, are appointed by the Human Rights Council to examine and report back on a country situation or a specific human rights theme. The positions are honorary and the experts are not United Nations staff, nor are they paid for their work.