There are legislative loopholes that allow Western companies, banks and financial institutions, to buy forgiven debt of a developing country with the intention of collecting later on when the country may have cash. These companies or Vulture funds establish themselves in tax havens for the single purpose of acquiring debt at a fraction of it value and then, as a creditor, seeking payment if and when the country is solvent and can pay. Debt collection by a creditor must be sanctioned by the courts, debt collection laws, and legislation regarding debt forgiveness. Is it possible that hedge ‘vulture funds’ are given a pass legally to conduct business this way at the expense of poverty stricken countries? Is there anything stopping these funds from buying Greece’s debt at a fraction and collecting later?
Vulture funds operate legally under the domestic and international legal infrastructure that allows them to do so. There are some jurisdictions that are attempting to prevent vulture funds from various legal systems, such as India, Belgium and the United Kingdom. Those nations anti-vulture fund legislation, among other things, proscribes access to courts by companies collecting on debts from High Indebted Poor Countries. As of yet, no similar legislation has been successful in the United States.
Vulture funds recently suffered a loss in the reorganization of Washington Mutual Inc (WMI). The Bankruptcy court ruled that certain distressed debt hedge fund creditors- Aurelius, Owl Creek, Appaloosa, and Centerbridge- traded WMI subordinated debt based on material non-public information they had learned from their lawyers involved in the reorganization of WMI. The court disallowed their claims under the reorganization for equitable reasons.
I am going to spend a little time looking into Vulture funds and how they are regulated in the United States and elsewhere.