An Unlikely Alliance: ‘Vulture’ Investors and Anti-Corruption Advocates in Emerging Markets

From The International Herald Tribune, an interesting article on how ‘vulture’ investors may be making an unlikely & unanticipated contribution in the fight against corruption in developing countries such as the Republic of Congo. While I tend to view creditor litigation against developing countries as somewhat distasteful, given the development & economic burdens such nations already face, the article presents some important points:

“…Western investors, sensing a chance to rake in millions, are suing to recover old debts that they bought for pennies on the dollar.Such investors, running what critics derisively call vulture funds, have been widely denounced by the World Bank and the International Monetary Fund for forcing poor countries to fend off costly lawsuits rather than build classrooms and clinics.

But in the Congo Republic, where a deep-seated culture of graft has squandered so much of the nation’s wealth, these investors have become unexpected allies of anti-corruption campaigners, who say such lawsuits may be the only way of holding the country accountable for how it spends its money.

…the fight between the Congo Republic and an affiliate of an American hedge fund, Elliott Associates. For an undisclosed price, the company bought about $31 million in debt that the country took on in the 1980s but later defaulted on. Now it is suing in American, European and Asian courts to collect the principal plus interest and penalties – more than $100 million in all. So far, it has collected $39 million.

…organizations that fight corruption argue that these investors are exposing in court the corrupt networks of government officials, providing a much-needed check on mineral-rich states. Beyond that, anti-corruption campaigners, like the groups Global Witness and the Publish What You Pay Coalition, contend that when nations win debt relief without becoming more accountable, they will simply repeat old mistakes and end up deep in debt once again.

“If it were not for these vulture funds, we would not know any facts about the way our country’s wealth is being taken away,” said Brice Mackosso, a campaigner for greater transparency in the Congo Republic’s government. “We don’t agree with their ultimate aims, but they are the only ones capable of exposing the truth. No one else has the means.”

Critics, by contrast, argue that virtually all countries use their debt relief savings to help the poor, and that so-called vulture funds achieve outsize returns from long-forgotten debts at the expense of the world’s poorest people.

…Ethiopia faces $187 million in claims from litigating creditors despite a history of famine and grinding poverty, according to the IMF. Others are still scarred by war, like Sierra Leone, which faces $31 million in claims, according to the IMF. Moreover, while investor lawsuits may expose nefarious dealings, they may also make governments more secretive to avoid asset seizures.

…Debts are bought and sold all the time, and Western courts have awarded hundreds of millions of dollars in judgments to debt investors. Peru is the best-known example: In 2000, Elliott Associates, whose founder, Paul Singer, is a top Republican donor and a backer of Rudolph Giuliani’s presidential campaign, won a $58 million judgment on debt it had bought in 1996 for $20 million.

Now African countries are in the sights of debt investors. In 1979, Zambia borrowed $15 million from Romania to buy agricultural equipment. Twenty years later, the two governments agreed to settle the old debt for about $3 million. But a hedge fund, Donegal International, bought it first and sued for about $55 million. This year, a British court ruled that Zambia must pay Donegal $15 million….”

This entry was posted on Tuesday, December 11th, 2007 at 7:33 am and is filed under Democratic Republic of Congo.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.