Debt relief for poorer countries: Green Paper Consultation – September 2011.

STATES OF JERSEY

DEBT RELIEF FOR POORER

COUNTRIES:

GREEN PAPER CONSULTATION –

SEPTEMBER 2011

Presented to the States on 15th September 2011 by the Chief Minister

STATES GREFFE

2011   Price code: C  R.114

2

Chief Minister's Department

Green Paper

PROMOTION OF DEBT RELIEF FOR POORER COUNTRIES  15th September 2011 Purpose and type of consultation

To seek views on whether Jersey should enact legislation to limit practices that could undermine international debt relief efforts.

Closing date: 8th December 2011 _____________________________________________________________________ Summary

In the years leading up to the Millennium, some of the poorest countries of the world borrowed money from other countries and from institutions such as the World Bank, which they later found impossible to repay. This so-called sovereign debt' has since proved a major hindrance to their development and in securing a route out of poverty.

In  response,  the  richest  countries  of  the  world  set  in  train  various  international initiatives designed to deal with this problem. These initiatives generally provided for the sovereign debt to be written down or written off as and when the poorer countries showed evidence of their commitment to, and progress in, their own development.

A practice has since emerged where companies, often referred to as vulture funds', buy sovereign debt at a substantial discount on the open market and then pursue private legal actions against the poorer country to recover the full sum. Their prospects of obtaining full payment are greatly improved as a direct result of other international debt being written off through one or other of the debt relief initiatives.

The  UK  has,  uniquely,  put  legislation  in  place  to  limit  the  sums  which  can  be recovered  in  legal  actions  of  this  type.  A  recent  case  in  the  Royal  Court  has highlighted the question of whether similar limiting legislation should be enacted in Jersey. This consultation seeks to obtain views on such a proposal.

Your submission: Please note that consultation responses may be made public (sent to  other  interested  parties  on  request,  sent  to  the  Scrutiny  Office,  quoted  in  a published  report,  reported  in  the  media,  published  on  www.gov.je,  listed  on  a consultation summary, etc.).

If a respondent has a particular wish for confidentiality, such as where the response may concern an individual's private life, or matters of commercial confidentiality, please indicate this clearly when submitting a response.

1. The context of the Consultation

1. The Millennium saw a concerted effort and renewed ambition in the international community to assist with the development of the poorer countries of the world and to deal with the issue of unsustainable debt.
2. The UN Millennium Declaration expressed a determination by UN members to –

"deal comprehensively and effectively with the debt problems of low- and middle-income developing countries, through various national and international measures designed to make their debt sustainable in the long term".

3. It called upon the industrialised countries both –

"To implement the enhanced programme of debt relief for the heavily indebted poor countries without further delay and to agree to cancel all official bilateral debts of those countries in return for their making demonstrable commitments to poverty reduction"; and

"To grant more generous development assistance, especially to countries that are genuinely making an effort to apply their resources to poverty reduction".[1]

4. This Consultation Paper is set against the background of these international aspirations and the debt relief effort which has surrounded them.

2. The HIPC Initiative and other poverty-reduction initiatives

1. In the decades leading up to the 1990s, many of the poorest countries in the world built up substantial debts which proved, and have continued to prove unmanageable. In servicing these debts, some countries were obliged to make payments that were far beyond their means.
2. Various private and international policy initiatives were set in train in an attempt to alleviate these problems. A key initiative was the Heavily Indebted Poor Countries (HIPC) Initiative, launched in 1996 with a view to ensuring that no poor country faced an unmanageable debt burden.
3. As a result of this Initiative, and an enhanced version which followed a review in 1999, 40 countries (see Box 1) have been identified as having a combination of low average income and unsustainable debt levels.
4. For these 40 countries, many of them in sub-Saharan Africa, the enhanced HIPC Initiative establishes a process which allows a potential route out from debt-related poverty.

3. The stages of the HIPC Initiative

1. There are 2 defined stages to be reached under the HIPC Initiative.
2. The first  stage  involves  achieving  macroeconomic  stability  and  the development of a poverty reduction plan. This brings the country concerned to the "Decision Point". At this point a commitment is given by participating countries and multilateral institutions to reduce their debts to a sustainable level and the 19 permanent members of an informal organisation known as the Paris Club2 provide immediate interim relief on debt service payments.
3. At the Decision Point, a series of goals or triggers' are set for that country to achieve the second stage, known as "Completion Point". These triggers are agreed  through  discussions  with  the  country  concerned,  the  International Monetary Fund (IMF) and the World Bank. They seek to guarantee that the debt relief obtained or promised at Decision Point is directed towards the reduction of poverty and building economic growth.

4. The IMF and World Bank also calculate the percentage of debt reduction which,  if agreed  by  all  relevant  creditors,  would  reduce  the  country's indebtedness  to a  sustainable  level.  The "Common  Reduction  Factor"  is published  within  the  Decision  Point  document3,  and  sets  the  reduction expected from  all  creditors  after  they  have  provided  so-called  traditional relief' at 67%4.
5. By way of example, if the Common Reduction Factor is set at 33%, a debt of £100 would first be reduced by traditional relief at 67%. The remaining £33 would then be further reduced by the 33% Common Reduction Factor to give a final figure for the debt at £22.

2. For further details of the membership and constitution of the Paris Club, see http://www.clubdeparis.org/en  
3. The Decision Point documents produced for those countries which have reached this stage are available at http://go.worldbank.org/9W8I0X55A0

4  This traditional relief' derives from the Paris Club's Naples terms', agreed in 1994

6. When the Decision Point triggers are achieved and the Completion point reached, the Paris Club and principal multilateral institutions (the IMF, World Bank, etc.) cancel their debt to the extent mandated by the Common Reduction Factor.
7. Under the separate Multilateral Debt Relief Initiative (MDRI)[2], some multilateral institutions provide 100% cancellation of debt at this stage. As a matter of practice, the UK and many other major creditor countries do likewise (thereby going beyond the requirements of the HIPC Initiative).

4. The rise of the "vulture fund"

1. When a company becomes insolvent, relevant domestic laws generally provide for a process in which all creditors become subject to the same insolvency scheme and all realise the same proportionate loss on the sums they are owed. Despite various proposals, there is no similar worldwide scheme which operates in relation to countries and to sovereign (i.e. government) debt.
2. The voluntary nature of the HIPC Initiative and other initiatives can lead to a so-called free rider' problem where one creditor country refuses to participate and, instead, continues to pursue its debt in full against the debtor country concerned. It is, of course, legally entitled to do so as the HIPC Initiative does not alter any legal rights and liabilities as between HIPCs and their external creditors.
3. That said, any success by a creditor litigant in such circumstances is inevitably at the expense of the other creditors. Action of this type taken against HIPCs proves particularly inequitable to those creditors who, voluntarily, have cancelled their own debt in an effort to help the HIPC climb out of poverty.
4. The issue may be exacerbated where the sovereign debt is not being pursued by the original creditor but by a third party (often a company or fund) that has bought sovereign debt owed by a HIPC on the open market. Given that the prospects of repayment by the HIPC are considered poor, the market value of the debt being sold is usually very low in comparison to its face value.
5. The purchasing party then chooses not to participate in the HIPC Initiative or any other debt-reduction initiative. Instead it holds out', perhaps whilst the HIPC in question reaches Decision Point and Completion Point with the consequential release and reduction of much of that country's other debts. It then claims the full value of the debt and interest and seeks enforcement by pursuing the country's assets through the courts in the jurisdiction where those assets are held. Companies and funds that carry on such activities have been labelled vulture funds' and, generally speaking, attract moral censure (see Box 2).

6. Vulture fund' is a term which is equally applied to companies and funds which pursue distressed commercial debt (as opposed to sovereign debt). In what follows, however, the use of this term is restricted to those companies and funds which have purchased sovereign debt with the intention of adopting a  holdout  strategy  and  pursuit  of  a  profit  through  all  available  means, including claiming through the courts.
7. Perhaps the most commonly cited example of vulture fund practice was the 2007 UK case of Donegal International Ltd. v Republic of Zambia. In this case, a $15 million debt from Zambia (a HIPC) to Romania was sold for $3.2 million to Donegal International Ltd., a company incorporated in the British Virgin Islands. After unsuccessful negotiations and attempts at binding settlement, Donegal eventually sued Zambia in the UK High Court for more than  $55 million.  Zambia's  liabilities  were  eventually  assessed  at approximately $15 million7.

5. The extent of the problem

1. Since the HIPC Initiative was launched, it is reported that at least half of all HIPCs have been targeted by vulture funds at one time or another.
2. An annual survey is conducted by the IMF to determine the extent of the problem. The HIPC Status of Implementation Report 2010 (hereafter the IMF 2010 Report)8 suggests that, as at September 2010, there were 17 current

6  Excerpted from "The African Legal Support Facility Website":

http://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/african-legal-support- facility/vulture-funds-in-the-sovereign-debt-context/

7. Official case report: http://www.bailii.org/ew/cases/EWHC/Comm/2007/197.html BBC News report at: http://news.bbc.co.uk/1/hi/6365433.stm
8. A full copy of the report can be found at: http://www.imf.org/external/pp/longres.aspx?id=4481

By the close of the consultation period, the 2011 Report may well be available

lawsuits against 9 HIPCs totalling some $1.22 billion, with unenforced judgments having been given for $183 million of that figure. Over 75% by value of the outstanding claims are directed towards the Republic of Congo and the neighbouring Democratic Republic of Congo

6. Non-legislative action to limit claims by vulture funds

1. There has been concerted action by the international community and, indeed, the markets themselves to limit the vulnerability of HIPCs to vulture fund claims.
2. In 1989, the World Bank established a Debt Reduction Facility for countries in the International Development Association (IDA), many of whom are also HIPCs. This facility continues to provide funding which allows participating governments to buy back sovereign debt from creditors at a heavy discount. It has resulted in the extinguishment of over $13.8 billion of debt and interest from IDA countries, including 18 HIPCs.[1]
3. In 2007, the G7 urged all sovereign creditors not to sell on HIPC sovereign debt[2] and there has since been commitment by the Paris Club, EU Members and the signatories to the UN's Doha Declaration on Financing for Development[3]to restrict any sale of such debt to creditors who participate in the HIPC Initiative.
4. The African Legal Support Facility was established by the African Development Bank at the end of 2008. One of its clearly stated aims isto assist Regional Member Countries with technical legal advice in dealing with lawsuits and other claims brought by vulture funds.

7. Legislative action to limit claims by vulture funds

1. Set against this, worldwide legislative action appears by all accounts to have been minimal.
2. Legislation was proposed (unsuccessfully) in the National Assembly of France in 2007 and 2008[4].
3. As at September 2010, the IMF 2010 Report speaks to only 3 other attempts at legislative intervention.

4. It reports that a Belgian Law of May 2008 ensured that Belgian development loans could not be seized or transferred, irrespective of applicable law or any waiving  clauses  in  the  contract.  This  provided  limited  protection  to low- income countries in receipt of such loans.
5. In the US, the "Stop VULTURE Funds" Bill was introduced to Congress in June 200913. It was designed to limit the ability of non-participating creditors

to seek awards from HIPCs via US courts. The Bill was referred to the Sub- committee on Courts and Competition Policy, but by the close of the 111th Congress, had not been passed. As a result, it was cleared from the books and never became law. It remains to be seen whether it will be introduced again in the current 112th Congress (which commenced on 3rd January 2011).

6. Although  the  IMF  2010  Report confirms  ongoing  lawsuits  in various jurisdictions around the world, including France, Sweden, USA and Russia (all Paris Club Members), the UK is the only jurisdiction in the world to date to have enacted anti-vulture fund' legislation.

8. The Debt Relief (Developing Countries) Act 2010

1. On 21st July 2009, the UK government consulted on legislation to ensure the effectiveness of debt relief for poor countries'14. The consultation proposed that,  in addition  to the  existing  non-legislative  measures  (such  as  those summarised above), complimentary legislation should be enacted to prevent creditors of HIPCs pursuing excessive recoveries on their debts through the UK courts and undermining the debt relief effort provided by other creditors (such as the UK government).
2. The consultation generated an e-mail campaign urging legislative action, and 23 written responses from businesses, organisations and individuals.
3. The Debt Relief (Developing Countries) Act 201015 was enacted on 8th April 2010 and came into force on 8th June 2010. In broad terms, the Act sought to limit the proportion of a sovereign debt that any commercial creditor could reclaim through litigation under UK law. This limit was set in each case by direct reference to the Common Reduction Factor calculated by the IMF and the World Bank for the HIPC in question. For those HIPCs who had yet to reach Decision Point and be given a CRF, the traditional' 67% discount was imposed. Box 3 highlights the key elements.

13  HR 2932 introduced by Maxine Waters, a democratic member of the House of

Representatives: see http://hdl.loc.gov/loc.uscongress/legislation.111hr2932

14  Copies of the consultation, impact assessment, responses and UK government response are

available on the UK government electronic archive: http://webarchive.nationalarchives.gov.uk/20100407010852/http://www.hm- treasury.gov.uk/consult_debt_relief.htm  

15  http://www.legislation.gov.uk/ukpga/2010/22/contents

4. The Act  was  initially  temporary,  with  a  sunset  clause'  ensuring  that  it continued in force only until 8th June 2011. However, it has since been made permanent.[5]

9. The effect of non-legislative and legislative action

1. The most recently published evidence does suggest that the legislative and non-legislative measures taken around the world are taking effect.
2. Whilst  some  reports  suggest  otherwise,  there  is now  reliable  evidence emerging  of  a  decrease  in  vulture  fund  litigation.  The IMF  2010  Report reported  that  its  annual  survey  of  HIPCs  showed  only  one  new  lawsuit (against the Kyrgyz Republic) to have been initiated in the year to September 201017.
3. That  said,  this  apparent  decrease  in litigation  should  not  necessarily undermine  the  continuing  importance  of  the  issue  given  that,  in many instances, the sums involved even in one claim can be substantial.

10. The case of Hemisphere v Democratic Republic of Congo

1. Jersey  currently  has  no  equivalent  legislation  to the  UK's  Debt  Relief (Developing Countries) Act 2010. This has been noted internationally,18in part as a result of a recent decision of the Royal Court.
2. The case of FG Hemisphere Associates LLC v Democratic Republic of Congo

& Others19 (27th October 2010) concerned the enforcement against a Jersey company of a 2003 arbitration award against the Democratic Republic of Congo (see Box 4 for summary).

17  http://www.imf.org/external/pp/longres.aspx?id=4481 at paragraph 26 (and Table 16). It

should be noted also that these figures report the response of 37 of the 40 HIPCs and that they do not discriminate between claims brought by original sovereign creditors and those brought by so-called vulture funds'

18  See for example, the comments of Dr. Cephas Lumina; UN Daily News 19th May 2011:

http://www.un.org/apps/news/story.asp?NewsID=38437&Cr=debt&Cr1=

19  [2010] JRC 195. Delivered on 27th October 2010 and available as an unreported

judgment on: http://www.jerseylaw.je  

11. Vulture funds and Jersey – the current position

1. There is currently no evidence that vulture funds themselves are or have been constituted in Jersey, though some are certainly constituted in other less well- regulated jurisdictions.
2. The Jersey Financial Services Commission (the "Commission") has published a  Sensitive  Activities  Policy21.  Amongst  other  things,  this  policy  requires information  on  "sensitive  activities"  to  be  provided  at  the  time  of  an application under Article 2 of the Control of Borrowing (Jersey) Order 1958 ("COBO"). This isto enable the Commission to determine whether to give consent  for  a  company  to issue  shares  or  make  such consent  subject  to conditions.
3. In applying this policy the Commission is mindful of the requirements, in both Article 2(3) of the Control of Borrowing (Jersey) Law 1947 and Article 7 of the Financial Services Commission (Jersey) Law 1998, to have regard to the need  to protect  and  enhance  the  integrity  of  Jersey  in commercial  and financial matters and to safeguard the best economic interests of Jersey.
4. In line with these requirements, where an application is made under Article 2 of COBO in respect of a company that proposes to buy discounted debt issued by a HIPC and then to seek to recover the full value of that debt (or greater amount), the Commission will not consent to the issue of shares. This accords with  a  statement  made  by  the  Chief  Minister  to the  States  Assembly  on 19th June 200722. Where it is proposed that a unit trust or partnership will be similarly  engaged,  the  Commission  will  not  consent to the  issue  units  or creation of partnership interests.
5. Whilst  the  Sensitive  Activities  Policy  is currently  under  review,  the Commission  does  not  propose  to change  this  approach.  However,  it  is intended that the policy should also clearly be expressed as applying to unit trusts,  limited  partnerships,  limited  liability  partnerships,  separate  limited partnerships and incorporated limited partnerships. It should also explain how the policy is applied after consent has been given to issue shares, units or interests.
6. Given the powers and stated stance of the Commission on these matters, it is likely  that  any  future  involvement  by  Jersey  with  vulture  funds  will  be restricted  to its  identification  as  a  jurisdiction  with  assets  vulnerable  to enforcement  or  execution  claims  by  such  vehicles  (as  in the  case  of Hemisphere).

21  See:

www.jerseyfsc.org/the_commission/general_information/policy_statements_and_guidance_notes/ 22  See:

http://www.statesassembly.gov.je/documents/hansard/2984-4803-1372007.htm#_Toc170638554

12. Vulture funds and Jersey – the future

1. As mentioned above, the recent Hemisphere case has caused concerns to be expressed both by members of the public and by members of the States, as well as attracting the attention of local and international media. This concern has tended to focus around the question of whether vulture funds should be allowed  to pursue  enforcement  actions  through  the  Royal  Court.  It  has resulted in calls for the enactment of legislation equivalent to that in the UK.
2. Jersey is, in myriad ways, a jurisdiction different from that of the UK, not least in its commercial, fiscal and international profile. The chief purpose of this consultation isto gather views over the extent to which such differences affect the moral and practical imperatives for enacting equivalent legislation.
3. Clearly,  in deciding  how  this  issue  is taken  forward,  the  maintenance  of Jersey's  international  reputation  will  be  a  key  consideration.  It  will  be necessary both to preserve Jersey's commercial reputation as a jurisdiction which  honours  and  enforces  the  sanctity  of  contractual  relations,  and  to maintain  Jersey's  political  reputation  as  a  transparent,  well-regulated  and respected international finance centre.
4. The development of the UK law has provided not only a model deserving of full consideration, but also a rich resource of material and analyses of the many arguments both for and against the introduction of legislation of this type.  In  preparing  their  own  representations,  respondents  may  find  some considerable  benefit  in consulting  the  H.M. Treasury  documentation (referenced above), including the responses to consultation.
5. Responses are sought generally on the issues raised and, in particular, to the following questions.

How to respond

The deadline for responses is 8th December 2011.

All respondents should indicate the capacity in which they are responding (i.e. as an individual, company, representative body, etc.). If you are responding as a company or representative body, please indicate the nature of your business and/or your clients' business. Representative bodies should identify on whose behalf they are responding and the methodology they used to gather responses.

Responses and any additional comments may be sent to any of the following:

Debt Relief Consultation Chief Minister's Department Cyril Le Marquand House PO Box 140

St. Helier

JE4 8QT

E-mail: debtreliefconsultation@gov.je  _____________________________________________________________________

Jersey  Finance  Limited  will  co-ordinate  an  industry  response  incorporating  any matters raised by local firms or entities.

Heather Bestwick Jersey Finance Limited 48–50 Esplanade

St. Helier

JE2 3QB

E-mail: Heather.Bestwick@jerseyfinance.je