The unhelpful “vulture” meme

By Felix Salmon
September 21, 2009
Johann Hari resuscitated the "evil vulture fund" meme, concentrating especially (and extremely selectively) on the deal between Zambia and Michael Sheehan.

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In advance of the G20 meeting, the Independent’s Johann Hari resuscitated the “evil vulture fund” meme, concentrating especially (and extremely selectively) on the deal between Zambia and Michael Sheehan.

Hari is late to this story: I gave a very full version of it on my blog back in February 2007, and everything I wrote back then is still germane today. But Sheehan has replied to Hari, and his letter’s worth reading, so I’ve put it after the jump.

Interestingly, the G20 meeting this year might well coincide with some kind of announcement from the Argentines that they are reopening their old debt-exchange deal from 2005. One of the sticking points with any deal is that Argentina’s finance minister, Amado Boudou, has said that he doesn’t want to do any deals with “vultures” who are litigating against Argentina in New York. He probably needn’t worry: they’re probably not the kind of investors likely to tender into any deal in any event. But the heated rhetoric surrounding this issue is clearly helping no one. Which is why it’s sad to see contentious columns like Hari’s.

In any case, here’s Sheehan’s letter:

Dear Sir/Madam:

Every year, a week before the G20 Summit I am treated to so called articles describing me as a secretive billionaire that kills African babies.  

The intention is to create such lurid imagery that no delegate to the meetings would ever dare to speak up in support of a market based approach to debt to poor countries. This is the “name and shame” technique that is as old as the hills… and highly effective if not challenged. It is polemic however, not journalism, and should be recognized for what it is.

To my dismay, I am not a billionaire. My house was bought for less than half a million and my “vintage” Cadillac is five years old and beginning to show the wear and tear. But this is not the point. The lies told about me personally, while hurtful, are merely part of a much larger game with much more serious implications.

The unfortunate consequence of Mr. Hari’s and Jubilee’s polemic is that the very real and important topic of debt relief is distorted through an emotional lens. The intention is to demonize sovereign debt and the people who deal in it and make it evil. The old religious and, dare I say it, communist imagery is summoned for this purpose with pictures of the grim reaper, evil, sinister capitalists swimming in lucre, vultures and dead and dying children… all used to describe participants in the secondary market for sovereign debt that is vital to the welfare of billions of poor people the world over.

For my own part, there is no mention that the Donegal debt was bought to fund investment in Zambia through debt conversion. There is no mention of my five years spent in Africa converting debt for charities for a US NGO set up with US Government funding. The Debt for Development Coalition was a not for profit that structured debt for local currency conversions using aid funding to buy debt and leverage into local currency all over Africa, Latin America and Asia. The funding agencies were governments of the OECD countries and private charitable donors. The entities using the technique were the well known (and by Mr. Hari’s logic exploitative) NGO’s such as UNICEF, CARE, WORLD VISION, the WORLDWILDLIFE FUND, AFRICARE… etc. No doubt they were our innocent victims as well…

In fact, DDC designed the debt for development conversion option under Zambia’s World Bank funded debt buy back in 1993 which generated a fifty percent “profit” which was used to raise additional development funding for the country.   All the participants were required to develop new programs and base funding for those programs to be able to participate. This was required to assure “additionality”… Far from being evil, these programs generated over US$100 miillion of new additional funding for health care and education programs for the poorest of the poor in Latin America, Africa and Asia. Debt conversion was used throughout the late eighties and the nineties by almost all highly indebted Latin American countries to jump start their economies.

But that was back when the glass was half full and creative approaches to debt retirement were encouraged, not demonized as exploitative, cynical manipulations…

This approach has not been allowed, however, in Africa. Not by the Africans themselves, but by their self appointed minders in the massive development set and the political parties that see votes in the topic. African debt conversion programs were shut down because the World Bank in its wisdom wanted to depress the pricing on Africa’s commercial sovereign debt so it could be bought back more cheaply… With this upside down logic it was felt that the damage of hurting the debtor’s countries’ credit risk profile was more than compensated for by the discount that would be achieved in the buy backs…   Who were these African governments to dream of credit ratings anyhow? Hmm… sound logic, no?

The disconnect on the topic of sovereign debt of poor countries is perverse and pervasive. I have come to realize over the years that this is because the arguments against debt recovery are not really about debt recovery. They are arguments against people from rich countries making money from poor countries. Hence the leap in logic is made that a dollar earned from a highly indebted poor country is a dollar taken from the mouth of a starving child. Based on this logic, all profit making ventures in poor countries should be shut down and their owners prosecuted for manslaughter. Under this logic, a dollar made in a mining venture in Congo or Zambia is coming straight from the budget of the Ministry of Health and a dollar made building a railroad in Chad or Mali is almost certainly coming straight from the budget of the Ministry of Education.

The problem with this polemic is that it demonizes debt and by extension investment in the poorest countries of the world at a time when more of it is needed… not less. In the process, it makes the debtor governments concerned look like they are not fit for anything other than being the wards of the rich Western world… It also scares the hell out of large Western multinationals considering investment… and the African officials just mutter to themselves, “Thank God the Chinese don’t go in for this rubbish or we would be consigned to poverty forever.” (that is a quote by the way).

The sad thing is that the polemic about debt is actually hurting those it is intended to help. Developing African countries, like poor countries everywhere, need commercial loans to survive and prosper. As much as Mr. Hari would like it to be, the West does not have enough dollars to develop Africa with grant funds and well intentioned NGO’s cannot run these countries. Nor do these countries want that. As you yourself recently said, this is the worst form of paternalism…

NGO’s are fond of using the anlogy of bankruptcy to describe how the debt of countries should be treated so perhaps I should use one as well. Governments, like companies, need long term, medium term and short term loans to survive and for their economies to grow. If you create ideologically and therefore subjective standards such as the “odious debt” doctrine to evaluate the morality of these loans after they have been made, noone is going to take the risk of making more of them. At least no one in the West.   And this at a time when commercial trade finance debt for these countries is literally frozen… without an export credit guarantee from one of the OECD government subsidized credit insurers, you cannot move the paper in the commercial market…

The bankruptcy analogy ultimately fails because as Kenyes said, countries don’t go broke.   As a result, unlike in bankruptcy, the price of sovereign loans never goes to zero. This residual pricing is vital to lenders and borrowers alike as it provides a base price for each sovereign’s credit risk on default. This makes it possible for creditors and credit insurers to make loans at lower rates of interest and spread the risk across the market. And guess what? That actually results in investment in the borrowing country, the creation of jobs, the payment of taxes, the funding of development.

If as Mr. Hari and his friends in the movement would like, you make it illegal to buy loans of highly indebted poor countries (HIPC’s) or if you cap the amount someone can make from a loan purchased in the secondary market, you are going to eliminate that base price. By doing that you will drive up the cost of credit and credit insurance for all HIPC countries, regardless of whether they have recently defaulted.

At the end of the day, then, the anti-vulture legislation will accomplish exactly the opposite of what it set out to do. It will have increased the debt burden of all HIPC countries, increased the cost of credit for all HIPC countries, increased the barriers to foreign direct investment for all HIPC countries and increased the amount that will be demanded from the OECD countries in support of aid budgets for all HIPC countries. There won’t be any savings. The costs will be in the billions and will be annual costs you won’t get rid of.

You will, of course, in the process have increased the power and leverage of the development set, but then that was the intention all along, wasn’t it.  


Michael Sheehan

Debt Advisory International, LLC

Washington, DC 20006

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