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New anti-vulture fund legislation in Belgium: an example for Europe and rest of the world

Added 12 May 2015
This is a guest post by Jan Van de Poel, Policy officer with Eurodad member 11.11.11

On Wednesday last week (6 May) all major parties represented in the Belgian federal parliament signed a proposal that will curtail the harmful speculation by vulture funds: investment companies that buy up defaulted debts for bargain prices and then sue the country in question for full immediate repayment. Belgian Eurodad members 11.11.11 and CNCD-11.11.11 – together with the Committee for the Abolition of Third World Debt (CADTM) – have long been advocating for more stringent legal measures against vulture funds and welcome this proposal.

Vulture funds undermine development

Vulture funds target crisis countries that are already struggling to finance public services and infrastructure. They buy up defaulted debt at firesale prices, much below face value, refuse to participate in debt restructurings and instead sue the debtor, aiming for high returns. The lack of a comprehensive international framework to deal with debt restructuring means that vulture funds can get away with this behaviour. In 2007 Kensington International, a notorious vulture fund, laid claim on funds that were earmarked as development aid to Congo Brazzaville, preventing the construction of an hydroelectric facility. More recently Argentina suffered a violent attack by US-based vulture funds. As well as impeding the economic recovery of individual countries, the actions of vulture funds jeopardise debt restructuring efforts the world over.

Turning the vulture into a lame duck

The Belgian proposal, which still needs to be voted on before becoming law, provides a legal framework for avoiding ‘illegitimate advantages’ to hold-out creditors. An ‘illegitimate advantage’ is defined as a ‘manifest disproportion between the amount claimed by the creditor and the notional face value of the debt’. The proposal clearly takes away the incentive for vulture funds to start litigation in Belgium. Vulture funds will not be able to recover claims above the market price for which they had bought the debt on the secondary markets. The law also extends to foreign arbitration decisions that cannot be enforced in Belgium. In the past, vulture funds were already able to claim debtors’ assets as a result of a decision in a US-based court, for instance.

Interestingly, the law provides Belgian courts with some additional criteria for clarifying what constitutes an ‘illegitimate advantage’ involving a number of qualitative aspects related to the creditor and debtor itself: Is the creditor based in a tax haven? Was the debtor insolvent at the time of the debt buyback? Does the creditor have a track record in litigation? Did the debtor take part in debt restructuring that the creditor refused? What are the socio-economic impacts of reimbursement on the debtor?

Brave little Belgium?

This initiative clearly positions Belgium as a pioneer in efforts to stop vulture funds. Only a few countries have adopted anti-vulture fund legislation. In 2010, the UK parliament passed legislation to prevent vulture funds from making exorbitant profits out of debt restructurings. A proposal has been tabled in the US Congress but was never enacted. Although national legislative measures are of themselves not sufficient to effectively stop vulture funds, they deliver a clear message to the international community that multilateral efforts are needed to end this kind of predatory behaviour. 

A multilateral legal framework to deal with debt restructuring would render the strategies used by vulture funds ineffective. Belgium, and other EU governments, should pick up these signals and enter the ongoing debate about such debt work out mechanisms within the UN’s General Assembly. The third conference on Finance for Development in Addis Ababa in July this year offers an excellent opportunity to move forward on this important issue. It is an opportunity that should not be missed.