A/HRC/14/21 A. Multilateral initiatives 38. The IDA Debt Reduction Facility, established in 1989, provides grants to heavily indebted IDA-only countries to enable them buy back, at a significant discount, commercially held external sovereign debt.41 The facility provides grants for both the preparation and the implementation of commercial debt-reduction operations. In order to be eligible for support from the Debt Reduction Facility, countries must meet certain conditions, including the demonstration of “satisfactory performance under a medium term adjustment program” and implementation of a “satisfactory strategy for debt management that seeks comprehensively to address commercial debt, provides substantial relief from official bilateral creditors, and enhances the country’s growth and development prospects”.42 Since its inception, the facility has helped extinguish approximately US$ 10 billion of external commercial debt. 39. In April 2008, changes were made to the policies and procedures of the Debt Reduction Facility to improve its effectiveness at assisting eligible countries to reduce their burden of sovereign commercial external debt and reducing the opportunities for commercial creditors to profit from litigation against HIPC countries. In terms of the modifications, formerly bilateral debts sold to commercial creditors and domestic debts sold to external creditors after the HIPC decision-point reference date are no longer considered eligible for buy-back. These changes aim to prevent distressed debt funds (i.e., vulture funds) from making a profit by buying claims at a deep discount and tendering them for a buy-back under the facility and to discourage the sale of debt from official to commercial creditors.43 40 Despite these successes and enhancements, the Debt Reduction Facility has a major limitation: participation by commercial creditors is entirely voluntary. In other words, the facility does not prevent a creditor from holding out and then suing to recover the full face value of its debt instrument. The case of Liberia illustrates this problem. In April 2009, commercial creditors provided debt relief to Liberia under a debt buy-back operation under the facility and contributions from bilateral donors, which extinguished US$ 1.2 billion of commercial debt at a deep discount of 97 per cent of face value. Despite this buy-back, the non-participating creditors continued to hold claims against Liberia worth 85 per cent of the cost of the facility buy-backs. In November, the British High Court ordered Liberia to pay more than US$ 20 million to two vulture funds (see para. 16 above). Thus, as the Government of the United Kingdom has acknowledged, the Debt Reduction Facility “cannot address the problem posed by creditors determined to pursue a higher payout than that given by HIPC Initiative terms”.44 41. In September 2006, the Commonwealth Secretariat established a Legal Debt Clinic to provide legal advice to both Commonwealth and non-Commonwealth HIPCs facing or likely to face litigation by commercial creditors. The clinic also aims to hold regional seminars to raise awareness about the legal aspects of debt management, legal soundness of loan agreements, debt restructuring and how to deal with litigation threats.45 41 42 43 44 45 GE.10-13156 See http://go.worldbank.org/DB88PB5XA0. See also B. Gamarra, M. Pollock and C.A. Primo Braga, “Debt relief to low-income countries: a retrospective”, in C.A. Primo Braga and D. Domeland (eds.), Debt Relief and Beyond (see footnote 13), pp. 24–25. See http://go.worldbank.org/2W4HSIN5I0. IDA and IMF, “HIPC Initiative” (2008) (see sect. III, footnote 5), p. 32, box 3. United Kingdom, Ensuring Effective Debt Relief for Poor Countries: A Consultation on Legislation (HM Treasury, 2009), p. 22. See www.thecommonwealth.org/Internal/39284/157583/legal_debt_clinic/. 13