The UK government and vulture funds

By Felix Salmon
February 23, 2010
published -- in the waning days of the Brown government -- its take on vulture funds, and whether there should be legislation trying to ban their activities. It's not clear whether the report has the backing of the Conservatives, but it is clear that a lot of good-faith hard work has gone into it, and that it's not in any way a knee-jerk piece of populist financier-bashing, a la Maxine Waters.

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The UK government has finally published — in the waning days of the Brown government — its take on vulture funds, and whether there should be legislation trying to ban their activities. It’s not clear whether the report has the backing of the Conservatives, but it is clear that a lot of good-faith hard work has gone into it, and that it’s not in any way a knee-jerk piece of populist financier-bashing, a la Maxine Waters.

The conclusion of the UK government, after considering submissions which were roughly equally weighted on both sides of the issue, is that legislation is justified, if it’s tightly constrained to include only a very narrowly-defined set of existing loans to a small group of highly-indebted poor countries. In that case, goes the argument, there’s little risk that the legislation will later be expanded to include a wider set of debts. What’s more, the report explicitly states that “it remains the Government’s view that it would be detrimental to both international development and financial markets to attempt to extend this legislation to countries that are not part of the HIPC Initiative”.

The obvious question, of course, is then why it’s not detrimental to international development and financial markets to implement this kind of legislation at all. Already it’s been stripped of any narrow applicability to vulture funds: it now applies to all creditors of HIPC countries, even commercial creditors who extended trade credit. Under the proposed law, all of them would effectively be bailed in to any debt-relief scheme that the Paris Club and other rich nations agreed upon.

The report calculates the benefit of the legislation at just £145 million, down from an initial estimate of £254 million. For that relatively modest benefit, the UK government seems willing to fundamentally undermine a large number of contractual and property rights, by unilaterally rewriting the law under which loans were agreed. I can’t help but wonder whether it might not be cheaper and easier for all concerned if the UK simply put £145 million into a kitty and made it available to any HIPC countries which ended up having to pay out large sums of money to litigious creditors in UK courts.

One of the worrying aspects of the report is that it seems designed to please no one: the two camps are far apart, and either want no legislation at all or want legislation covering not only a few past HIPC debts but also a large number of other developing-country debts, both sovereign and corporate, and both present and future. As a result, those voting in favor of such a bill are likely to be equally keen to support a much more far-reaching bill, and if this bill passes then that would make the passage of a stronger bill in future that much more likely.

The UK government doesn’t see it that way:

The Government, however, recognises that there will always remain at least a theoretical possibility of such legislation being introduced with respect to future debts by a future government. The perception of such a risk could arise irrespective of this proposed legislation. The Government remains of the view that it is unlikely that lenders will assess the increase in that risk resulting from the legislation proposed to be significant enough to affect the availability or terms of lending to low income countries.

This I think is clearly false. Up until now, the status of UK law as the governing law for many global financial contracts has meant that no government has wanted to interfere with those well-understood mechanisms in such a fundamental manner as this. If such interference ever happens once, the likelihood of it happening again surely rises substantially. At the very least, there would be a move in new lending from London-law contracts to New York-law contracts, which certainly counts as a change in the terms of lending to low-income countries.

So while this report is undoubtedly sensible and sober by the standards of most vulture-bashing, I still think that the possible benefits of its recommendations are tiny compared to its possible costs. And I take some solace in the fact that a new government is likely to come in to power in the UK, which probably won’t make this kind of legislation a priority in the foreseeable future.


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Highly indebted low income countries need to have the legal ability to default at will, and then immediately return to the capital markets for a top up.

The Brown government should immediately pass legislation stating that status as a recently defaulting country should under no circumstances be used as a factor in denying credit to a sovereign borrower.

This will allow credit to flow freely to creditworthy borrowers such as the Democratic Republic of the Congo, North Korea, Somalia and other countries unfairly penalized by bankers’ unwillingness to lend.

Posted by johnhhaskell | Report as abusive

The report states:

Against this background, a commercial creditor that successfully litigates and recoups the full value of its debt does so only by free-riding on the relief provided by others, including the great majority of commercial creditors. Legislation is an effective solution to this problem if the benefits of eliminating this free-riding on the component of the debt claim that represents an economic rent rather than the underlying asset value outweighs the cost of interfering with property rights. The Impact Assessment, while unable to quantify the net impact, sets out reasons for expecting benefits to exceed costs for legislation restricted to prevention of recovery of the economic rent component. Legislation that prevented this would help bring about a full, fair and necessary resolution of HIPCs’ debts whilst protecting the rights of all creditors to recover the economic value of their claims. The welcome provision of HIPC-comparable relief by the majority of commercial creditors would not be affected; instead legislation would help to ensure that the proportion of creditors that currently go against this approach would be prevented from doing so.


This is erroneous in that commercial creditors marked their paper down long before bilateral Paris Club creditors who were paid far more in interest than their original principal on the debt they wrote off in the HIPC program.

It is also gobbledy gook. It admits that really the sponsors of the legislation have no real idea of what its impact will be, either on the HIPC countries concerned or the UK itself. This is because it is impossible to precisely define. But it does not even consider the risks. If cost of funds for HIPC countries move even by 25 basis points, the estimated savings are blown away.

It is an admission that the motive for this legislation is political and that the authors really have no idea what the economic impact on the HIPC countries and the UK will be. Pre-election cocktail anyone?

At a time when the probity of the economic data of EU issuers is very mush in the news, it is surprising to see one of its largest debtors supporting such legislation.

Posted by MichaelSheehan | Report as abusive