Debt relief campaigners are unhappy that Zambia has been ordered by the High Court to pay back a debt to a private company.
The story appears in summary in the Telegraph, but I have also had a look at the case reports.
It all began in 1979 when Zambia borrowed £15m from Romania to buy agricultural equipment. (Nowadays it’s hard to imagine Romania as a lender country, but that was a very long time ago, obviously.)
In 1999, Romania sold on the debt to Donegal International, a private company, for £2m. In 2003, Donegal International and Zambia sat down and worked out an agreement as to how Zambia would pay them.
Zambia agreed to make 36 monthly payments. They agreed that if Zambia defaulted on any monthly payment, Donegal could, within 21 days of the default, terminate the agreement and sue to recover the outstanding amounts.
That is precisely what happened, and both parties found themselves before the High Court. Zambia claimed that they should not have to repay at all, but after considering all the legal arguments, the judge decided that Zambia should pay. However, he ruled that the amount of interest stipulated in the contract was punitive, so they will not have to pay that. Small comfort for Zambia.
Critics are up in arms. This case is being described as having exposed a loophole whereby private companies can enforce payment of debts from poor countries which are currently benefiting from debt cancellation.
I do not see what all the fuss is about. This debt was obviously not written off by Romania, as they would then not have been able to sell it on. To the extent that this is described as a ‘loophole’, I disagree. If a private company chooses to take the high risk of buying debts against poor African countries, then as long as it acts within the law, I do not see the problem. True, Zambia is a poor country, and much has been made of how that money could usefully have been spent alleviating the poverty of the Zambian people, but I would submit that that is not the problem of Donegal International.
There are sound economic reasons against debt forgiveness. While desirable for the debtor nation, it often does not relieve the suffering of the ordinary citizens of that nation. So many times people blindly advocate debt forgiveness without stopping to consider the long term effects on the debtor nation. This is grossly irresponsible.
At the moment, critics of the court judgment have restricted themselves to heaping abuse on Donegal, for instance calling them a ‘vulture fund’. I do not believe that emotional blackmail should be used against a private company conducting its business within the limits of the law, but that is a sign of our times, and I have learned to live with that. However, what I would really not want to see is a clamour for legislation to make it illegal for British companies to buy debts in this way. It cannot be too long before someone starts advocating that.
February 16th, 2007 at 4:40 pm
Bel, is it the case that had Zambia would have been able to escape liability by claiming State Immunity? I would assume that by entering into the agreement with Donegal, they implicitly waived their right to immunity? They could have refused to accept the assignment of the debt, and they wouldn’t now be in this situation.
February 16th, 2007 at 10:42 pm
You are right on with this. An interesting feature of currently fashionable ethics is that it is respectable to brow-beat others for not giving to the abject. (This kind of morality is much more affordable than giving oneself.)
Therefore it is acceptable to criticise Donegal for not giving millions to Zambia - or really to the Zambian government cronies (which is undoubtedly composed of men wealthy beyond dreams).
February 17th, 2007 at 11:18 am
This is a very well written piece Bel. Your argument is very persuasive.
February 17th, 2007 at 2:06 pm
I suppose the only concern I would have is that the circumstances in which Romania lent Zambia the 15 million in the first place were very different to the new situation Zambia finds herself in. After all, donegal presumably is motivated entirely by the chance to make a profit, whereas other factors would have been at work in the initial loan.
Of course, it would be naive to ascribe too much altruism to the Ceacescu regime.
I must admit to having been a little disconcerted when my student loan was sold off by the Student Loan Company months after I had graduated.
I suppose the main concern is to ensure that the spirit of the original loan is maintained and that such loans never become ‘punitive’. At the same time, writing off such loans completely almost uncertainly harms African countries long term by dissuading would be lenders from investing.
I am reminded of ‘The Merchant of Venice’.
February 17th, 2007 at 7:46 pm
Joe’s comment about his student loan is very interesting. It illustrates that when you borrow, you are putting some of your finances outstide of your control. To quote the good book, “the borrower is servant to the lender”. Your master now owns a ‘bit’. If he chooses to sell it to another, you may be disconcerted, but you have no say in the matter. In recent street language - “you’re owned!”
February 17th, 2007 at 9:19 pm
Tory Lady, in fact, the State immunity point is an interesting one. Donegal accepted in court that Zambia could have avoided paying by invoking State immunity against commercial action. All Zambia had to do was refuse to accept the assignment of the debt by Romania to Donegal, and Donegal would have been skewered. Rather than do this, Zambia sat down with Donegal to work out a payment plan. By this very action, Zambia implicitly waived its immunity. This proposition was not tested fully in the case. The judge accepted Donegal’s acknowledgement that they (Donegal) would have had no recourse if Zambia had just dug its heels in and refused to deal with them when Romania sold the debt to them.
It would have been interesting to see this point considered in court, one way or the other.
February 17th, 2007 at 9:35 pm
Cityunslicker, thank you for your kind words.
Joe, you are right when you refer to the difference in circumstances in 1974 and 1999 in Zambia.
In 1974, Zambia was under the rule of Kenneth Kaunda, who was experimenting with destructive theories of African socialism. Zambia had just gone through the Mulungushi Reforms, following which many foreign-owned firms were nationalised. In the same period, the price of copper, Zambia’s main export, began to fall, and Zambia needed money to address the shortfall. By contrast, Romania was, at that very time, enjoying a short period of economic success.
By 2003, when Zambia and Donegal made the repayment agreement, Kenneth Kaunda had since been thrown out, having wrecked Zambia’s economy, and Levy Mwanawasa was now in charge. No more talk of African socialism and such matters.
February 17th, 2007 at 9:36 pm
About the student loan, I agree with Onyx Stone: the borrower is the servant of the lender.
February 17th, 2007 at 11:22 pm
Well Bel, my student loan is long ago paid off. But others still have that worry, and we were somewhat misled at the time.
I must admit to always harbouring the idea that as African leaders go, Kaunda was one of the good guys- when you compare him to the likes of Hastings Banda, Mobuto, Bokassa or the Mugabe of later years.
I suppose the key point here is the 2003 agreement. As you say, by making that the Zambian government have accepted entirely the situation that they are now in. They can’t complain.
You expected me to say otherwise, didn’t you?
February 17th, 2007 at 11:36 pm
Yes, you are right. I totally expected you to say otherwise. I was also surprised to hear your general views about debt forgiveness.
You must forgive me for misjudging you this time, albeit only in my mind.
February 17th, 2007 at 11:47 pm
Surprised? In what way?
Repaying debt and repaying exorbitant interest are different issues.
But in this instance I don’t think Zambia can complain they were misled at any stage.
February 20th, 2007 at 6:26 pm
Really good piece Bel
February 20th, 2007 at 7:27 pm
Thank you Pete
April 25th, 2007 at 10:03 am
Whilst I agree with most of the comments made here I feel you’re overlooking an important aspect to this story. There are undoubtedly hundreds of countries out there who are owed money by poor countries. Although they may not have written them off in the books they have certainly written them off in their minds.
Now along comes Donegal Int offering you a fraction of the original value for this debt. As you’ve already written it off you see this offering as a profit. You take it without really thinking of the consequences. Now DI, with it’s army of lawyers goes after the country in question. Not only do they demand payment but they also demand interest. This $15m Zambian debt for instance - they demanded payment of $55m - which luckily, as you point out, was thrown out by the court as punitive.
This may all be perfectly legal but I personally am filled with detest for groups like DI who prey (yes, like vultures) on these opportunities. It’s just another way that we the rich keep them the poor down.