When vulture funds circle, who will make debt repayments fairer?

Developing countries want an independent process for restructuring debt. But that would spoil the profit party for the west and its banks
MDG : Vulture funds and economy in Argentina : Protesters hold cutouts of vultures
Protesters during a demonstration in front of the US Chamber of Commerce in Buenos Aires, Argentina. Photograph: Victor R. Caivano/AP

At the UN general assembly this week,133 developing countries have unanimously called for a legal process for restructuring government debts. Such a process would mean that debts could be reduced in a fair and independent way that requires all lenders, including vulture funds, to take part in the debt reduction.

Developing countries are forcing the issue by putting to a vote the issue of whether a legal process is needed. International debt has been a largely lawless arena where power is in the hands of creditors; predatory financial actors such as vulture funds can buy up debts cheaply when countries are in crisis, refuse to take part in necessary debt reductions, then sue for a huge profit.

The proposal comes two months after a US judge blocked Argentina from making its sovereign debt payments. This bizarre situation was brought on by the greed of two US vulture funds, NML Capital and Aurelius Capital Management, which are seeking huge profits on debt they bought at rock bottom prices during the South American country’s debt crisis at the turn of the century.

But the root cause of this farce was neither the ruling of the judge in favour of the hedge funds nor the greed of the funds themselves. It was the absence of any fair and transparent multilateral system for dealing with government debt. This vacuum means that no agreed bankruptcy procedure exists for when governments cannot afford to repay debts, and there is no way to investigate whether debts that governments owe are actually legitimate – contracted by democratically accountable governments acting in the interests of their people.

Debt restructuring, or outright default, are wholly legitimate and sometimes essential routes out of debt crisis, allowing countries to restore the provision of basic public services and recover their economies, as happened to Argentina after its first debt default.

Yet powerful western governments, acting in the interests of their banks, have put significant efforts into preventing government defaults and ensuring that reckless lenders continue to be repaid. Their efforts range from providing bailout loans for the banks through institutions such as the International Monetary Fund (IMF), World Bank, or recently the EU, to scaremongering about the false consequences of a potential default. As long as banks continue to receive bailouts, government debt remains a low-risk but high-profit option. As long as reckless lenders continue to be repaid, the cycle repeats.

In theory, the UK should back calls for a legal process for restructuring debts. The government’s coalition agreement states that it “will review what action can be taken against vulture funds”. More than 100 backbench MPs support creating “a fair, independent and transparent arbitration mechanism for sovereign debt”. The Liberal Democrats have a policy to “lead international calls for the creation of a fully transparent international debt arbitration service”, though their silence in government has been deafening.

However, the UK is one of the most active blockers of such a mechanism. Last month, the UK, with France, Japan and Australia, prevented UN experts from making such a recommendation part of the process of how the world can meet sustainable development goals for tackling poverty and inequality from next year, when the millennium development goals expire. These western governments continue to put the interests of their financial sectors, for whom chaotic debt crises are a recipe for profit, ahead of creating a more stable global economic system.

When the UK does feel compelled to support changes to the regulation of international debt, it argues that all decisions should be taken within the IMF, a body in which it has a disproportionate voice. Despite only having 0.9% of the world population, the UK has 4.3% of the votes at the IMF. But since the IMF is itself a major lender, giving it the job of resolving debt crises is like making the prosecution in a court case both judge and jury.

Rather than reinforcing the power of the west and its banks, any debt arbitration mechanism needs to ensure justice is served. Any arbitration and assessment of debt should be led by a body that is independent of lenders, to ensure no conflict of interest. Sustainable levels of debt should be decided not simply on how much a country can afford to pay, but how much it can afford while meeting the basic needs of its people. And it should be possible to question the legitimacy of debts, so that odious regimes cannot contract debts unaccountably, then pass these on to the people they have oppressed once they are removed from power.

In the messy world of international debt, developing countries have thrown down a gauntlet. Now we’ll see whether western governments continue to act in the narrow interests of their banks and hedge funds, and seek to block, delay or divert this discussion to the IMF. Or will they finally start acting in the broader public interest, creating a more stable and sustainable system for dealing with international debt, through the UN?