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Vulture funds make off with very little

Felix Salmon writes up a World Bank report on the returns a vulture fund made off of Liberia:

Liberia, with the aid of the World Bank, has been negotiating with vulture funds holding $1.2 billion of its debt. You know what vulture funds are, right? They’re evil hedge-fund types who buy up debt at pennies on the dollar, and then sue for repayment in full, with interest and penalties and everything.

Just look at the deal they drove in this case! Liberia, one of the poorest countries in the world, is going to have to pay them, er, nothing at all. The World Bank is kicking in $19 million, a few rich countries are matching that sum, and the vultures are walking away with a not-very-princely-at-all $38 million, or just 3 cents on the dollar. Which probably barely covers their legal fees, let alone the amount they paid for the debt in the first place.

Let's read that again: the World Bank and Liberian government negotiated a deal so that vulture funds holding $1.2 billion in debt ended up with a check for $38 million -- three percent!

It's distressing that Liberia got in such a bad fix. It needed to raise funds and banked on future growth to make the payments -- but a bloody civil war meant it couldn't. The original lenders decided to sell the loans off to vulture and hedge funds who drove a hard bargain. Which meant that at one point, Liberia owed seven times its national income to creditors. 

So, the balance sheet -- in redux:

  • The vulture funds (name makes it hard to feel bad for them, doesn't it?) lost $1.26 billion on paper. (I doubt they paid the full $1.3 billion for the loans, the World Bank doesn't say.) For better or worse, it means they likely aren't lending anymore. 
  • Liberia, struggling with a crushing debt burden, found forgiveness. This is a good thing -- if Liberia's government has put in place measures to ensure security, stability, and economic growth. Johnson Sirleaf's at least making an effort. 
  • Liberia's rich friends (the United States included) stepped in with a bit of cash to help a very ailing economy. A good thing.
  • The World Bank negotiated what seems to be an amicable settlement. (Though the vulture funds might beg to differ.) A good thing for them.

Ultimately, though, Liberia isn't the story here. Emerging market and developing economies, like Liberia, will be among the hardest-hit in the Great Recession. Unlike OECD countries, they won't be able to issue debt or raise funds easily. They'll need the help of the international community -- and especially international organizations -- to ensure that their loans come with advisement and affordable repayment options. 

The hero here's the World Bank. Suddenly, it and the IMF -- especially the IMF, perhaps -- have become the world's most important international organizations. 

Dan Kitwood/Getty Images

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Morning Brief: Sri Lanka's nightmare

Top Story

A humanitarian catastrophe is unfolding right now in Northern Sri Lanka after Tamil Tiger rebels ignored a surrender deadline from the government and troops moved in to retake a rebel stronghold where tens of thousands of civilians remain trapped.

The area is restricted to journalists but the rebels claim that 1,000 civilians have already been killed in the assault. Over 39,000 people fled the area bringing the total number to around 50,000, but between 50,000 and 100,000 remain, according to Human Rights Watch. Rights groups have accused the Tigers of holding civilians against their will to serve as human shields. The Tigers are now confined to a 12 mile strip of land of the northern coast.

The International Crisis Group's Robert Templer writes for FP that while today's carnage is likely inevitable, "How the war ends will be critical to Sri Lanka's future." 

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