Vol 5 (2008) - Issue 4

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The State, the Vulture and the Debt

Introduction

The history of sovereign state borrowing is a fascinating story with several intriguing developments and the story is far from over. One aspect of this story which warrants academic attention and critical analysis is when a private creditor resorts to bribery to either: purchase a sovereign debt, or obtain confidential information on the sovereign’s attachable assets. The question being asked is whether corruption should constitute a defence for the debtor state?

Prior to tackling this question some foundational points need to be discussed to give clarity on how the question has arisen in the first place. To this end the writer proposes to first summarise the mentioned case of Donegal International Ltd v Zambia (hereinafter Donegal v Zambia) as a means to creating a backdrop for this discussion. Secondly, a historical recount on how sovereign debt has evolved to the point that it is now being traded in the secondary debt market. Thirdly, the emergence of vulture funds will be considered, as it appears that these entities have evolved perhaps under the radar, only to be recently thrown into the limelight due to their opportunistic/capitalistic (depending on what moral stance one is to take) actions. Entwined with the second and third points of discussion is how debtor states have further exposed themselves to be easy prey for such companies shall be briefly discussed. Finally, given the debtor states already weakened state and the aggressiveness of vulture funds the writer will look at whether corruption should be used as a defence against such claims.

Setting the stage

On 15 February 2007, four-year-old Nigel, under the auspices of Oxfam, visited the Royal Courts of England. What made this visitation worth public attention is that Nigel is a vulture, an African white-back vulture to be exact. The purpose of his visit was to protest of the court’s decision in the case of Donegal v Zambia, which social activists saw as ‘opportunistic profiteering of the worst kind – seeking to extract money from a country which is in desperate need of debt cancellation.’ Shifting our focus away from the dramatics of social pressure groups to the sober case analysis of a legal scholar the case was based on the following facts.

In 1979 Zambia borrowed USD 29,834,368 from Romania for the purpose of acquiring agricultural machinery. Zambia had been unable to service the loan and the countries engaged in various negotiations for the settlement of the debt which spanned from 1992 to 1995 and later from February 1998 to 1999.

Unknown to Zambia in 1997 Donegal International Ltd (hereinafter referred to as Donegal) approached Romania with various offers to buy the debt. An agreement between Romania and Donegal was eventually reached on 7 August 1998 subject to certain conditions being met. From this point on the debt was considered to be ‘under mandate’. The assignment was signed on 19 January1999 and the total consideration paid was of USD 3.2 million was paid on 21 January 1999.

Concurrent to theses negotiations, negotiations were also renewed between Romania and Zambia in 1998 for Zambia to buy back the debt. The negotiations cumulated in a Memorandum of Understanding being signed by the representatives of each state on 18 December 1998.