Like vultures waiting to swoop down on a rotting carcass on African plains, the same could be said of private investment firms who wait and buy debt on the secondary market for a fraction of its face value. Vulture funds supply liquidity when no one else wants to. That is why they are called vulture funds. They wait for others to ‘eat’ first. These vulture funds came into the spotlight again because of a recent trial between the government of Argentina and two New York-based private investment firms: ‘the debt trial of the century’.
Vulture funds are an aspect of sovereign debt, which has become an increasingly important topic in the aftermath of the current crisis. In this third blog in a series of Peace Palace Library Blogs about the Global Financial Crisis, I will highlight the ‘problem’ of vulture funds. What happened with vulture funds in the Argentina case and will it set a precedent for the rest of the (developing) world? Why do these vultures like debt carcasses so much?
The current legal conflict between the government of Argentina and two New York-based private investment firms dates back to 2001-2002, when Argentina suffered an economic crisis and defaulted on its foreign debt. A (foreign) debt crisis is a situation in which a country cannot service its foreign debt. The debt crisis in Argentina can be seen as the largest in history. Since 2010 the European Union and its Euro zone have also been facing a sovereign debt crisis of some of their member states. When a government runs into such difficulties servicing their debt, a restructuring programme can be set up. Creditors can decide to join the restructuring and accept a lower payment or they can sell the debt to someone else at a discount.
The new creditors that purchase these debts at a discount have been named vulture funds. A specific group of creditors that buy up sovereign debt at a low price and sue the sovereign to secure a full return. In contrast to public lending by the International Monetary Fund, other states and private commercial banks, private investors have no institutionalized representation on the international level. They do not accept a so-called ‘financial haircut’ and refuse to participate in a restructuring programme. They may use litigation and take the sovereign debtor to court. And that is exactly what ‘the vultures’ did to Argentina.
Argentina Debt Case
A major problem resulting from the Argentine crisis was that most of the country’s foreign debt was owed to a large number of those private investors. Two of these private investors, NML Capital and Aurelius, filed a lawsuit against the government of Argentina. In August of this year, the New York Appeals Court declared that Argentina has to pay its private creditors in full. Hence, the Court ruled in favour of vulture funds. The case has now been appealed to the U.S. Supreme Court.
While the ‘sovereign debt trial of the century’ continues in the U.S., two other cases attracted the world’s recent attention. Last year, NML Capital convinced a Ghanaian Court that the military vessel ARA Libertad, which was sailing in Ghanaian jurisdiction, should be held ransom for the debt the vulture funds claimed Argentina owed them. Argentina made a request to the International Tribunal for the Law of the Sea (ITLOS) to release the military vessel. On the 15th of December 2012 ITLOS unanimously ruled that Ghanaian authorities had to release the vessel. On the 27th of September this year Argentina and Ghana also signed an agreement on the immunity of warships after the arbitration case at the Permanent Court of Arbitration.
The world hopes for a similar outcome in favour of Argentina in the pending debt case in the U.S. What if the vulture funds survive and Argentina has to pay the full value? Will it set a precedent?
Vulture Funds Impact
‘Don’t make poor pay rich debts’
A quote from debt campaigners against the vulture funds attack on Argentina. It shows us that the Argentinian people have condemned the practice of vulture funds. But world leaders, the IMF and the World Bank also criticized the problem of vulture funds. They say a victory for the vulture funds could undermine future debt restructuring procedures. It will set a precedent and it will have implications for other indebted countries, especially poor countries. On the other hand, vulture funds might be criticised but they also serve a purpose; they supply liquidity when no one else wants to.
However, regardless of the outcome of the ‘debt trial of the century’, it is important that the international community (re) considers a range of debt restructuring measures. According to Eric LeCompte, executive director of Jubilee U.S.A., a network of anti-debt campaigners, some aspects of the financial crisis could have been prevented if we had basic, common-sense principles on responsible lending and borrowing within the international financial system.
But for now, private investors are still allowed to look out and wait for debt on the secondary markets. Like vultures looking for carcasses!
This was the third blog in a series of Peace Palace Library Blogs about the Global Financial Crisis. Previous Peace Palace Library Blog: Tax Havens: Sunny Islands?
A selection of relevant publications from the Peace Palace Library collection
- Goren, J., “State-to-State Debts: Sovereign Immunity and the "Vulture" Hunt”, The George Washington International Law Review, 41 (2010), No. 3, pp. 681-708.
- Miller, M.H. and D. Thomas, “Sovereign Debt Restructuring: the Judge, the Vultures, and Creditor Rights”, in R.W. Kolb (ed.), Sovereign Debt: From Safety to Default, Hoboken, NJ, Wiley, 2011, pp. 211-225.
- Schlemmer, E.C., “The Enforcement of Sovereign Debt”, in M. Giovanoli and D. Devos (eds.), International Monetary and Financial Law: the Global Crisis, Oxford, Oxford University Press, 2010, pp. 418-446.
- Wautelet, P., “Les fonds vautours: Vulture Funds, Creditors and Sovereign Debtors: How to find a Balance?”, in M. de Audit (dir.), Insolvabilité des états et dettes souveraines, Paris, L.G.D.J. Lextenso Éditions, 2011, pp. 103-164.
- Wheeler, C.C. and A. Attaran, “Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Debt Litigation”, Stanford Journal of International Law, 39 (2003), No.2, pp. 253-284.