Tackling vulture funds: New UNHRC report demands a human rights approach
At its upcoming session on 20 September, the UN Human Rights Council will discuss a new report
, coordinated by Jean Zielger, on the harmful activities of vulture funds and their impact on human rights. This report shows how vulture funds negatively impact human rights and gives recommendations on how the international community, as well as individual countries, should address this situation.
Vulture funds are uncooperative hedge funds or private equity funds that buy, on the secondary markets, bonds or loans owed by crisis countries cheaply, at prices far below their nominal value, and then sue for full payment. Undermining attempts to restructure the debt, vulture funds threaten the financial stability of the countries they are attacking, delay the solution of debt crises, and make such a solution more costly.
Some countries have in the past years adopted legislation aimed at stopping vulture fund litigations, most notably Belgium, who adopted the most recent and most comprehensive anti-vulture funds legislation
. This legislation is however being attacked in Belgium courts
by a vulture fund, NML Capital. In parallel, because of the vulture funds attack against Argentina, in 2015 the G77 started a process at the UN which concluded with the adoption, by a large majority of the UN General Assembly
, of Basic Principles on Sovereign Debt Restructuring Processes. Vulture fund activities are indeed only made possible by the inexistence of an international sovereign debt restructuring mechanism.
While the economic and financial impact of vulture funds’ activities has been widely analysed
, the biggest innovation of this report is the analysis of vulture funds’ impact on human rights. The report stresses that vulture fund claims, by diverting much needed resources, have an impact on governments’ capacity to fulfil their human rights obligations, in particular economic, social and cultural rights. In particular, lengthy litigation can “worsen the already significant economic and financial consequences attached to the crises and lead to policies that have a severe impact on the enjoyment of human rights”.
Litigations themselves, a common feature of vulture funds’ techniques to force repayment, can be financially costly for countries that already lack financial resources. When the country has to repay the vulture fund, if often must cut social budgets. This has a negative impact on human rights but also on the country’s development. The report presents the case of Malawi, which in 2002, sold the maize from its food reserve agency to raise funds to repay loans. 7 million people out of a population of 11 million faced food shortage as a consequence.
Vulture fund activities also threatened the IMF and World Bank Heavily Indebted Poor Countries (HIPC) initiative that provided debt relief to cancel or reduce the debt burden of poor debt-distressed countries. This initiative freed up financial resources for its beneficiaries that were then claimed by vulture funds in many cases. While the initiative was launched to reduce poverty and improve social services in very poor countries, thus improving human rights, it eventually benefited vulture funds instead, as they were able to seize financial resources that the initiative made available.
It is not only developing countries that are under threat from vulture funds, but developed countries as well. Recently, Greece and Puerto Rico were victims of vulture funds. This shows the necessity for the international community to tackle this issue.
The report suggests two ways to protect poor countries affected by vulture funds: First, the adoption of national laws against vulture funds that could, for instance, limit the profits that vulture funds can make through their litigation, which would threaten their business model, and second, the establishment of a mechanism for sovereign debt restructuring that should prioritise human rights obligations over debt servicing. The report concludes that: “A State’s obligation to ensure the enjoyment of at least the minimum core of economic and social rights should take priority over its debt service obligations, particularly when such payments further limit the country’s ability to fulfil its human rights obligations”.
This UN Human Rights Council report is a welcome step. It must now be seen how the UN will continue its work on this issue.