Introduction
| Author | Poornimah Devi Sookun |
| Pages | 1-4 |
Introduction
Until recently lawsuits against sovereign states were rare. In the past, sovereign states
enjoyed immunity from litigation. However, this situation changed dramatic ally when
countries began to borrow money and entered into loan agreements to raise capital
for economic development and infrastructure. Borrowing became an attractive solu-
tion for the least developed countries (LDCs), and in many cases a necessity. But
borrow ing means repayment, and even for a sovereign state the obligations of a
loan contract do not disappear. Creditors cannot be forced to negotiate restructur-
ing or refinancing plans, or an alternative option to demanding repayment. They
cannot be barred from taking the ultimate solution under a loan agreement – suing
the sovereign state before a cour t of law.
Vulture funds are investment funds which buy up distressed sovereign debt at a low
price and then sue to secure a high return. The term ‘vulture fund’ is a vivid image,
which describes the way these funds prey on poor countries on the brink of debt
relief. Such creditors do not hesitate to take legal action. As courts of law are bound
to deal with a lawsuit according to the terms of the loan agreement, judgments have
had a negative, often unfair, impact on sovereign debtors, at times paralysing their
economies. From the point of view of the creditors, they have been acting legally,
but they have been named and shamed as vultures, and branded as immoral and
perverse. However, the question that arises is: should the principles of legal egali-
tarianism apply when the debtor is a poor country in debt distress, and where
poverty and hunger prevail?
Lawsuits against sovereign debtors became more prominent aft er the International
Monetary Fund (IMF) called on all creditors to write off the debts of heavily
indebted poor countries (HIPCs). The international financial institutions (IFIs) intro-
duced the HIPC Initiative in 1996 under pressure from millions of campaigners who
believed that the burden of debt was undermining any prospect of development in
some of the world’s poorest countries. Progress has been slow, although the Initiative
was enhanced in 1999. One reason has been that creditors are reluctant t o partici-
pate in the Initiative and may choose to sell on their debts to vulture funds.
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