As I was driving to work this morning I heard a harangue on the radio about vulture funds. An unprincipled opportunist/astute businessman had bought $44 million worth of Zambian debt at a deep discount, for less that $4 million, had sued Zambia, and was awarded 15 million in court. The person on the radio was outraged.
It seems totally legitimate to me, except under the following conditions.
1. The debt is odious, e.g. because a country was ruled by a dictator who used the money for private benefits. In this case the debt should be considered personal. In an ideal world, if a poor country didn’t have the means to pursue members of a former dictatorial regime, it could sell the debt to a vulture fund, which would then perform a valuable social service in going after funds stashed away in various places.
2. The debt is illegitimate because the lender failed in its fiduciary responsibilities. There has been a lot of reckless and incompetent lending by the World Bank and other aid organizations. In these cases, debts should be canceled. That is not “debt forgiveness”. There is nothing to forgive.
The very existence of an aid organization implies that expertise is supposed to flow from the aid organization to the poor country. Aid organizations must therefore bear most of the responsibility for failed aid projects.
Maybe vulture funds could play a useful role here as well. A country could sell its claim on a bank or aid organization for cancellation of debt and reimbursement of payments towards an illegitimate loan (with interest and damages), and the vulture fund would try to collect from the organization. Now here is a business opportunity. Go, Vultures!
Update: Here is a really useful post on felixsalmon.com.