Monday, December 10, 2012

Human Rights and Debt Relief in the Age of Vultures

The Argentine Libertad, held in Ghana
due to a sovereign debt dispute.
by Blake Hulnick
Twitter: @bhulnick

When Argentina officially took its place on the UN Security Council on October 22nd, the celebrations were brief, and Argentina’s Minister of Foreign Affairs, Hector Marcos Timerman, had an urgent piece of business to raise with Secretary-General Ban Ki-moon.  The Fragata Libertad, an Argentine naval frigate, had been detained in Temma, Ghana for weeks, and the government continued to demand its unconditional return.

The Libertad finds itself in this unusual predicament because a U.S.-based investment firm petitioned courts in Ghana for its seizure in their quest to be made whole on a long-unpaid $1.6 billion judgment stemming from Argentina’s 2001 default. The unfolding situation provides a rare public glimpse into a novel field in international law beginning to reverberate throughout the human rights community.

The Argentine government called the attachment of their ship a violation of the Vienna Convention’s diplomatic immunity rules and even outright extortion, but the issue may be more complicated. For years, so-called “vulture funds” have built a business model acquiring distressed sovereign debt,  often at deep discounts on the secondary market from frustrated creditors. The funds then pursue collection in every corner of the world, often at many times the original amount. Where they succeed, the result can be a substantial profit. The funds’ harshest critics say they frustrate third world debt relief efforts, hamper hard-won economic reforms, and raid the treasuries of poor countries struggling to provide basic social services and ensure the human rights of their citizens.
Another situation unfolding in the Democratic Republic of the Congo is a case in point. FG Hemisphere, a Manhattan-based investment group, bought twenty-year-old DRC debt from a Bosnian creditor. FG reportedly paid about $3 million for the debt, and is now in the process of suing the DRC for $125 million to collect on it. Barred by sovereign immunity from collecting directly from DRC's public offers, FG sought to attach assets based in the Isle of Jersey (UK). The money they sought was income from the DRC's state-owned mining company ("Gecamines") extracting cobalt from an abandoned copper mine's slag heap known as the "Big Hill." Perhaps not coincidentally, the action comes on the heels of DRC receiving $12.3 billion in debt forgiveness through an IMF/World Bank program.

The United Nations Independent Expert responsible for monitoring third world debt, Dr. Cephas Lumina, considers the funds a threat to development and treaty progress under the International Covenant on Economic, Social and Cultural Rights (ICESCR):

“It is critical to put a halt to such unconscionable profiteering,” noted Mr. Lumina. “Awards to vulture funds diminish the impact of debt relief for these countries and undermine the core objectives of internationally-agreed debt relief measures…

“From a human rights perspective, the settlement of excessive vulture fund claims by poor countries with unsustainable debt levels has a direct negative effect on the capacity of governments of these countries to fulfill their human rights obligations, especially economic, social and cultural rights, such as the rights to health, water and sanitation, food, housing and education,” stressed the Independent Expert.

Specifically, Lumina and other critics in the international human rights community point out that the success of opportunistic debt collectors might frustrate the lofty aspirations of the ICESCR (which the DRC ratified in 1976) to provide, for example, guaranteed social insurance under Article 9, or universal education under Article 13.

Jubilee Debt Campaign, a leading NGO voice in opposition to the investors’ practices, has advocated for legislation at the state and national levels, as well as abroad, to thwart efforts to collect large settlements from poor countries.

Perhaps the most eloquent (and vituperative) defense of the funds came from Peter Grossman, the recently unmasked director of FG Hemisphere, who posted a statement online following the withering array of attacks leveled against him and his business model. Aligning with the views of some development economists, Grossman points out that in many cases, the proceeds from the activities he’s targeting in court aren’t being put to good or transparent use. The NGO Global Witness, for example, has been highly critical of DRC’s recent sales of billions in state-owned mining assets to well-connected buyers at a discount, claiming some $5.5 billion in public funds may have disappeared this way over the last few years.

If true, the DRC may have run afoul not only of its rationale for opposing FG Hemisphere's collection, but also the country's transparency obligations under the multilateral Initiative for Highly Indebted Poor Countries and more general commitments under the ICESCR, as enumerated by the Independent Expert.

As Argentina’s sailors wait in Ghana and Grossman continues to pursue the DRC’s cobalt income, the rights and development communities will be watching closely. The highly interconnected nature of the international legal system means many countries’ courts will grapple with this issue in the years ahead, likely in unexpected and potentially ill-prepared venues. As old debt continues to change hands and multilateral forgiveness frees assets, countries will need to engage a far more specific debate—internally and multilaterally—about what treaty obligations and rights aspirations require.


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