Sovereign debt relief, or merely write-downs?

BBC Newsnight (Wed 14 February) just ran a piece by Greg Palast, produced by Meirion Jones on vulture fund companies taking third world countries to court to recover debts.

Greg Palast's piece on vulture funds and debt relief -- replete with gumshoe-style mock drama on the streets of Washington DC -- was very weak. Disappointingly, Jeremy Paxman's follow-up studio interview failed to redeem the situation.

It seems that the voters in creditor countries have been sold a lie. Our elected leaders, pandering to self-righteous rock stars and their legions of 'concerned' fans, have made grandiose statements about relief and cancellation of poor countries' debts. We the taxpayers have taken the financial hit via write-downs, naively thinking we are party to an act of generous national charity.

Then, creditor governments have simply turned around and quietly SOLD the debt to vulture funds at a written down price (the lure of cash today proving more attractive to Treasuries than the prospect of recovering even the written-down value at some uncertain future date, as would be required for genuine debt relief).

Here, the naivete of producer Meirion Jones in the web article accompanying the Newsnight piece is astonishing:
"Vulture funds - as defined by the International Monetary Fund and Gordon Brown amongst others - are companies which buy up the debt of poor nations cheaply when it is about to be written off and then sue for the full value of the debt plus interest - which might be ten times what they paid for it." (Emphasis added).

This makes it sound as if the creditor nations had no choice in selling the debt, rather than simply forgiving it, which is what they have told their electors they are doing! ('Vulture fund threat to third world').

Unfortunately, all this means that the debtor countries have been left holding the original liability, even as politicians in the West bask in the electoral glory of debt relief. The buyer of the debt now owns the repayment stream, such as it may be. (Presumably, what has been sold is the original loan instrument, against which the buyer of the debt sues. Otherwise, what is the vulture funds' legal claim?)

Naturally, vulture funds are not constrained by the political sensibilities of not suing the government of a poor country. And the original creditor governments can wash their hands and say: "Nothin' to do with me." It's like something straight out of 'Yes, Minister.'

None of this was properly explored by Newsnight. There will always be a market for buying and selling debt. Nothing wrong with that in principle. But elected governments should surely be held to account for their hypocrisy.

Then there was the studio interviwee's bemoaning of the money "taken out of" poor countries for debt repayment: as if no money had been put in (ie: loaned) originally. And there was no hint of a question from Paxman about where the loaned capital actually went! Why is it not generating a return sufficient to repay the debt?

Arguably, developed nations should not be lending to very poor countries at all. We should be making grants, and tying them to performance so the money benefits the poor instead of disappearing into financial black holes and benefiting such people as the corrupt elite of Africa, the "Wabenzi" passing by the poor in their convoys of bullet-proof Mercedes.

Apparently, it doesn't occur to anyone at the BBC, not even to Jeremy Paxman, that there might be some merit in corrupt third world leaders being pursued by some hard-nosed debt speculators for some nice assets quietly tucked away, which might just have been paid for by funds siphoned off from sovereign loans ...

But, of course, we can't suggest performance-linked grants instead of loans, can we? After all, that was the idea of some guy with the initials G.W.B.

Come on Mr Paxman, sharpen up a bit!