Thursday, 15 February 2007

Newsnight plumbs new depths (an impressive feat!)

It was an impressive achievement, but Newsnight managed to plumb new depths last night. Its main article, devoted to questions surrounding companies that buy and sell national debt, repeatedly described them by the far-from-impartial moniker “Vulture Funds” and made no effort to give a balanced view. Rather, there was a disgraceful piece of polemic dressed up as journalism (I prefer my polemic naked). A less charitable viewer of Newsnight might say “business as usual, then”.

Third world debt is an emotive issue. Now that the West has largely put famine and pestilence behind is, we find it abhorrent that people should continue to suffer in conditions that we consider to be mediaeval, and we are understandably eager to do something about it. Thus we pick through Third World budgets, and particularly those that transfer money to the affluent West, and ask whether this expenditure would be better diverted to alleviating poverty. The money that Third World countries spend on servicing debt has become a totemic issue for many.
Meanwhile, for a very separate group of people, debt is a business, without which individuals, companies and countries would be unable to spend large sums of money that yield long-term benefits. If I could not borrow money I would forever be paying rent to a landlord instead of buying my own house; if our government could not borrow money it would not be able to build as many railways or hospitals; and if Third World countries could not borrow money they could not build the roads and ports they desperately need to trade their way out of poverty.

Sadly, the debt business is always viewed in rather emotional terms. “Never a borrower nor a git be,” as the witty wag, Stephen Fry, once said. Those who loan money are easily demonised, as Europe’s relationship with the Jews during the Middle Ages demonstrates. In fact, the trade in debt is not nearly the necrophagic business that anti-capitalists would like to pretend. In the event that a creditor is struggling to recover lent capital, it is entirely reasonable that they may accept a smaller sum to clear the business up quickly, and that a speculator might agree to take on the risk in the hope of recovering the full debt in the long run, and so make a profit over the knock-down price they paid.

To talk, as Newsnight did, of companies turning $5m dollar investments into $40m demands on Third World countries is disingenuous. The original debt would have been worth $40m whether or not it was sold on to a third party, but the original creditor had so despaired of ever seeing a return on their loan that they sold it on at a bargain price. The Third Word nation (in this case Zambia) did not lose out by seeing their debt sold on, except in as much as their original creditor may otherwise have despaired so utterly that the debt would never have been settled. The creditor (Romania, not exactly rolling in wealth and luxury itself) did not lose out, either, but rather judged that at the time it sold the debt, it needed the £5m more than it needed the hope of gaining the full value of the debt after a long, bitter and possibly hopeless battle. And the “Vulture fund” did not rip off the debtor, but instead met Romania’s need for a quick injection of cash and continued to pursue Zambia for an already existing debt.

The question remains, is it moral at all to seek to collect the debt when the average Zambian lives on a dollar a day? Sadly, the income of the average Zambian is beside the point, for the average Zambian is unlikely to see that $40m whether the debt is paid or relieved. Having visited Lusaka, I recall being told the story of how the president was unhappy with the size of the two swimming pools at State House, and so installed a third, grander one. It struck me that it would have been hard to find room for so many pools, as much of the grounds of this urban presidential palace were taken up by the president’s private safari park. It is also worth noting that Zambia’s defence expenditure has nearly doubled in less than a decade, from $68m in 1998 to $105m in 2005. While I am not usually enamoured of the “Defence money could be better spent elsewhere” argument, this and other discretionary expenditure does put paid to the suggestion that Zambia was unable to pay the debt, which has only mounted to $40m in 2007 because it has not be serviced for many years.

If we in the West believe that Third World countries should not be obliged to service debts their government’s incurred because there are better things for them to spend the money on, we should pay off their debts. Debts owed to other governments are easily forgiven, and have been. Debts to international organisations can also be relieved, but unless Western governments make up the shortfall, these organisations will not have money to lend to other needy nations.

But the debts resulting from private lending, or where private lenders have bought debt from other organisations, are now private property. Just as we would not countenance a government seizing a person’s house to build a road without adequately compensating them, so we should expect governments to compensate creditors – yes, even “vulture funds” – if they require them to forgive the debt. If government does not act, we may ask that the creditors show charity of their own volition, but we must be wary of tarnishing our request with a prurient distaste for the legitimate means with which they make their living.

My own prurient distaste for the way that Newsnight, et al, make their living, may be plain to see, but in my naivety I had expected a more elevated tone to its reporting than I was subjected to this evening.

10 comments:

Peter Pigeon said...

Good post, Tom. Personally I am often surprised by people who argue that we should lend more, but who don't like the fact that debts carry interest, and usually need to be repaid.

And - as you say - there is little argument against a secondary market in debt.

Edis said...

Am I right in thinking that the $40 million was the original 1979 debt plus accumulated unpaid interest?

Sorry,I think something still stinks in all this and I am glad Newsnight has publicised it.

An intergovernmental debt possibly subject to the current initiatives on debt relief should not be sold on at so-called full value to the private market.

Tom Papworth said...

Yes, it was the original 1979 debt, which Zambia was perfectly capable of repaying.

The "current initiatives" only apply to those governments that choose to sign up to it. If Romania would rather sell its debt on, that is its right as a soveriegn nation.

Chrisco said...

Even the IMF uses the terminology of 'vulture funds/companies', and recognises that they can have a very negative contribution on debt management for LICs by blocking debt restructuring by swooping in to buy up the debt when the will exists among donor nations, undermining the debt relief agenda for which a great deal of political will exists. The Peruvian example mentioned in Newsnight was actually, in my opinion, much more illustrative than that of Zambia, but then again it is Africa that has the most emotive impact on the public conscience.

Norfolk Blogger said...

And what about the fact that these "vulture funds" are buying the debt just as it is about to be written off, then refusing to allow it to be written off, thus preventing measures aimed at reducing third world debt.

Also, what about the example they used og Congo/brazzaville where they are buying debt from that country, but claiming it is run by criminals so they can use laws that allow fines to be trebled (using laws aimed at trebling fines on mafia and organised crime).

Yet somehow you can justify this ?

Newsnighter said...

Tom - we're always glad to plumb new depths but I'm sure you won't mind if I correct your most obvious mistake.
No it wasn't the original 1979 debt. The case concerned a 1999 agreement obtained in extremely dodgy circumstances. You can access the full High Court judgment on the Newsnight site - link below. The case was still sub judice when we originally broadcast but we now have the full details. The judge as you will see called Goldfinger - sorry Michael Sheehan from the vulture fund - "dishonest" and said he had misled courts around the world. The Newsnight report was discussed at the White House on Thursday. The Head of the House Judiciary Committee asked President Bush to investigate how the likes of Sheehan and Paul Singer are able to get away with it and President Bush indicated that he would take action on vulture funds. If the President is about to switch sides that will leave you in a very small minority with your views on vultures. Here's hoping to plumb deeper depths.

http://news.bbc.co.uk/1/hi/programmes/newsnight/6370385.stm

Tristan said...

Here's an idea: those who are so worried about such things should set up a fund to buy the debts. They're free to do so.

There is nothing wrong with buying a debt from someone else. If its about to be written off, then you are taking on a huge risk.

There is also the question on whether the countries who have the debt wish to default. Surely they'd like a good credit rating, but defaulting on a debt will mean they take even longer to get that.

The biggest thing we can do for /people/ (not countries or governments) is to allow them to trade with us and for the corrupt governments that rule over them to reform. Debts like this are not the biggest issue, just one of the most emotive ones (if the debt wasn't there, the money would not be used for the good of ordinary people in many countries)

Tom Papworth said...

Nich,

That the far-from-wealthy Romanians are about to scrap the debt says more about how little hope they have of getting their money back than their compassion for the defaulter. Otherwise they'd decline the offer from the "Vulture Fund".

As I said in my article, if we wish to relieve Third World debt we should do so by paying it off rather than berating the creditors.

As for the Congo-Brazzaville example, in 2002 President Denis Sassou Nguesso won the election with almost 90% of the vote cast. His two main rivals Lissouba and Bernard Kolelas were prevented from competing and the only remaining credible rival, Andre Milongo, advised his supporters to boycott the elections and then withdrew from the race. But you question the suggestion that it is "run by criminals"!

Tom Papworth said...

Newsnighter,

Thank you for correcting the error. Of course if there is any illegality regarding the debts or the means that the "Vulture Funds" used to purchase them then these should be investigated - both by the authorities and by middle-brow journalists.

However, your article was directed more at the principle of a secondary market in debt. This has nothing to do with Mr. Sheehan's alleged misconduct and showed a prurient dislike for financial markets in general and creditors in particular.

Secondary markets for debt (for example, the bond markets) have in fact been amazing tools for freeing up capital and making it available to those who would invest for their nation's futures. That some governments have squandered that opportunity is hardly the fault of the creditors.

I am surprised by your sudden warmth towards the views of President Bush, however. For my part I've never much cared for them.

Keep plumbing!

Anonymous said...

Tom,

I thought your comments were spot on...

It is clear that other than Felix Salmon (felixsalmon.com), none of the reporters writing on this Donegal thing have read the judgment...

Given the inaccuracies in the film and the fact that all of the allegations of wrongdoing were rejected by the judge, it does seem interesting that Newsnight just happened to launch its show and print its article the night before the judgment was handed down... hence avoiding the unpleasantness of having to accurately report what it said...

It is also interesting that they are rather selective in what they report since the judgment makes clear that Donegal spent three years or more making debt conversion proposals to the government to convert the debt into local currency for inward investment...

The judgment makes clear that Donegal only sued after those debt conversion proposals were turned down by the Zambian government three years after the purchase...

On the dishonesty bit, the judge actually contradicts himself and at the end states that Sheehan was not so much dishonest as "cavalier" in his testimony... The allegations of deception were in any event convoluted, revolving around whether there had been sufficient disclosure to justify orders for leave to serve out of the jurisdiction and for asset freezes... there wasn't anything juicy in there at all and in fact all charges of bribery and illegal conduct were explicitly rejected by the judge...

And the idea that the BBC could not find a qualified banker to appear on the after show interview to give the counter argument in defence of distressed debt funds is a bit much...

There is a banker under every stone in the City... most of whom would love to give chapter and verse on the topic...

You were right, this was polemic masquerading as journalism... and not very good polemic at that.

I have no great sympathy for vulture funds, but I have even less for journalists that misreport on legal cases of some import in order to make news rather than report it...

Disgruntled Lawyer