Prospects for increasing the regulation of vulture funds in the United States and globally have "barely improved" since 2010.
Vulture funds in some major Western countries, which invest in debt considered to be very weak or in default, have long been criticized for making profits from countries in financial distress and further exacerbating their financial problems.
With loose regulations, those vulture funds buy extremely risky debt at highly discounted prices and then use numerous methods to sell the debt subsequently, thus gaining a huge profit against what they paid for it. To stop such speculative practices, experts have called for more actions involving multilateral efforts to regulate and supervise the market.
For decades, the architecture of the international financial system has been "designed to permit, and even encourage" not only individual debt but also national indebtedness and speculation on it, Daniel Ozarow, senior lecturer in the Business School at Middlesex University London, said.
That allowed the emergence of vulture funds and made them able to "effectively gamble on people's misery," he said.
Besides targeting individuals and corporations, vulture funds, nicknamed for the bird that feeds on carcasses, often target sovereign governments cannot pay debts they owe. They waited for the growth of bond values during economic recovery, or sought to sue those countries for often billions of U.S. dollars for the value of the original debt plus interest and penalties.
A typical case is the 15-year battle between Argentina and a group of U.S.-based vulture funds. During its economic depression in 2001, the Latin American country defaulted on tens of billions of dollars in sovereign debts, some of which were purchased by vulture funds in the secondary market.
In 2016, Argentina agreed to pay six vulture funds with a total of 6.4 billion dollars. Their tactics included seeking injunctions to attach future payments to other bondholders by way of forcing Argentina to settle.
Through these, Ozarow said, they are "holding global south countries to ransom and preventing them from spending on their people's welfare."
"As the burden of national debts continues to impede growth, development and poverty alleviation in the world's poorer countries, they remain trapped in a historical cycle of dependence upon the institutions of western financial capital," which "also locks them into a politically subservient relationship" with Western powers, the scholar added.
In the views of Ozarow, lack of regulations in the global financial system as well as the strong lobbying power of vulture funds are among the main reasons that make it difficult to prevent such actions of vulture funds, which former British Prime Minister Gordon Brown described as "morally outrageous."
With growing concerns about vulture funds' propensity to target sovereign debts and the effect of their debt collection actions against impoverished nations, some Western countries including Britain and Belgium have taken measures to introduce legislation to prevent the funds from benefiting from defaulted sovereign debts.
If you wanna do crimes, make them incredibly complicated and technical. Like the hustlers that came into the bookstore I worked at and spun these long-ass stories about why they needed money for a Greyhound ticket home.— Cory Doctorow (@doctorow) June 15, 2021
Those guys shoulda studied the private equity sector.
However, experts said, these legislations are far from enough to restrict their speculative actions in the financial market. Prospects for increasing the regulation of vulture funds in the United States and globally have "barely improved" since 2010, said Ozarow.
Tim Jones, head of policy at the London-based charity Debt Justice, formerly Jubilee Debt Campaign, said that most international debt contracts are governed by British or U.S. law, therefore the two countries "have the responsibility to ensure that private lenders, including vulture funds, take part in internationally agreed debt restructuring."
Meanwhile, Ozarow suggested more collective and coordinated efforts of the international community in response to the issue. As vulture funds "can simply sue national governments by using alternative courts in other countries," restricting vulture activity within the geographical boundaries of any one country by any one government through legislation only have limited purpose, he said.