Photograph: A. Currell

It is a rare event that can put the International Capital Markets Association (ICMA) and the United Nations General Assembly on the same side of a battle. One seeks to protect capital markets and the other seeks to protect sovereign debtors, objectives that are commonly seen to conflict. Yet both have united in a single cause—changing the international principles governing sovereign debt. Each organization has decided to make new rules for the handling of sovereign debt in the aftermath of a particularly disruptive court victory led by a major vulture fund. This, in itself, is historic.

The battle against vulture funds took off in the 1990s and reached a kind of apotheosis in June 2014 with a U.S. Supreme Court decision that ultimately risked Argentine default. The International Monetary Fund (IMF) and other international institutions support the avoidance of sovereign defaults because they can destabilize the global economy. A key strategy for this has been for sovereign debtors to negotiate a discount, or a reduction, of sovereign debt with creditors in the event that they can no longer afford to pay. Prior to the Supreme Court decision, Argentina went through this process of debt restructuring and was prepared to pay all of its creditors the agreed-upon discounted value of its debt. However, it was prevented from making these payments by a court order that required full payment, plus interest and fees, to vulture funds, which held a mere 7 percent of the debt. This created a tremendous risk: were Argentina to comply with the vulture fund’s demands, holders of the remaining 93 percent of its debt would have the legal ability to demand the same, rather than the negotiated value of the discounted debt. In the June 2014 decision, the Supreme Court rejected Argentina’s appeal, resulting in the freezing of the funds meant to make a required payment on the renegotiated debt. Though Argentina would have otherwise been able to make the debt payments, it was prevented from doing so and catapulted into default as a result.

Two months later, the ICMA and the UN General Assembly both voted to bring about a new legal framework for handling sovereign debt, an indirect rebuke of the U.S. Court decision. Historically, the UN has been involved in global economic governance through specialized international economic bodies such as the World Trade Organization. Now, for the first time in its history, the UN General Assembly has taken on a prominent role in international economic issues. That vulture funds have inspired this shared position tells a tale about outsiders and insiders, and about bringing a sort of Wild West deep inside the establishment.

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The term “vulture” is not new in the world of finance. It was used in the United States at least as early as the mid-1800s to describe Wall Street. It emerged again as a descriptive term used by popular news sources in the early 1900s. An approximation of the current use of “vulture” emerged in the 1980s; as the number of sovereign debtors was growing rapidly, the term was used to describe funds specializing in buying discounted sovereign debt in order to sue those governments for full payment plus interest and fees.

Over the last four decades, sovereign debtors have lost ground through unilateral legislative acts and court decisions, mostly in the United States and the United Kingdom, that undermine sovereign debt restructuring. And this is no contained matter: over fifty governments have risked default from the1970s to the 1990s.

The international community originally responded to this sovereign debt crisis by building flexibility into the international lending system in order to help governments pay their debts. The IMF, the Club of Paris, other such institutions, and several key governments developed diverse arrangements and options, including the so-called Brady Bond mechanism, all geared to preventing sovereign defaults. However, by 1999, the IMF and World Bank, recognizing that forty-six governments might not be able to pay their debt under current conditions, instituted the HIPC (Highly Indebted Poor Countries) program. The program led to a restructuring and massive discount of many of those governments’ debts. This was possible because most debt holders were persuaded that accepting the discounted value was a reasonable option as, ultimately, the stability of the international economic system depended on it.

Vulture funds entered the picture as aggressive litigators launching lawsuits that were, one might say, not meant to happen.

Then, in the 1990s, vulture funds entered the picture as aggressive litigators launching lawsuits that were, one might say, not meant to happen. These funds bought sovereign debts from major banks at heavily discounted prices in order to sue countries for the full value of the debt plus interest and fees. And sue they did, with major success, bypassing established sovereign debt restructuring mechanisms and the prescriptions of financial regulatory bodies. Interestingly, their key battleground was local courts.

Over the last twenty years, a few of the most powerful of these vulture funds succeeded in having judges reduce the treatment of sovereign debtors to that of mere commercial entities that owed them money. What stands out, besides the aggressive suing, is the fact that judges mostly did not make room for traditional defenses afforded to a sovereign debtor in such cases. For example, champerty is a traditional doctrine originating in old English law that forbids the purchase of debt with the intent of bringing a lawsuit and comity is legal reciprocity between jurisdictions.

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Perhaps the most innovative of the vulture funds has been Elliott Associates L.P., also related to NML Capital, Ltd, the fund involved in the current Argentina case. Elliot has won several court cases in the U.S. against foreign sovereign debtors, as well as other legal victories in courts outside of the United States, including in the United Kingdom and Belgium. In 1996, Elliott launched its first in this series of lawsuits against the nation of Panama. Originally purchasing $28.7 million of Panamanian sovereign debt in 1995 for the discounted price of $17.5 million, Elliot sued Panama in a New York court for full payment of the original debt plus interest and fees. Elliott won the case and Panama’s government was ordered to pay, ultimately, $57 million to the fund.

A number of other lawsuits followed (see a few examples below). As the numbers show, Elliott’s gains have been wild, even by investment standards.

Elliott, et al.'s Sovereign Debt Purchases


Purchase Amount

Awarded Amount/Private Settlement


$17.5 million

$57 million


$11.4 million

$58 million

D.R. Congo

$30 million

~$100 million

Argentina (pending)

~$48 million

($2.3 billion)


In many ways, the Panama victory opened the door for other funds to conduct similar litigation. Among them were Dart Container Corp and EM Ltd., both linked toKenneth Dart, one of the most famous names in the world of vulture funds; NML Ltd.; Gramercy Advisors, a Greenwich, Connecticut-based firm, focused on Ecuadorian and Russian debt; Aurelius, also a major actor in the Argentina lawsuit; and FG Hemisphere.

What’s more, A 2012 court decision in New York further diminished the treatment of sovereign debtors through its extreme interpretation of pari passu, a principle that dictates all creditors are to be treated equally in a default or restructuring scenario. As a result of this interpretation, the court ordered that Argentina could not pay the holders of 93 percent of its debt (who had accepted the discounted debt arrangement) until Elliott and its co-claimants received their payment for the full original debt plus interest and fees.

And remarkably, just as the international community seems to be coming together to protect sovereign debtors, on September 29, Argentina was found to be in contempt of the Federal New York Southern District Court, where many of these decisions originated. The misalignment could not be clearer.

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Sovereign debt is not ordinary debt: it is the debt of an entire people. This is part of the rationale underlying much international intervention. Sovereign default can bring down a national economy, which can in turn generate serious economic repercussions both domestically and internationally. As we have seen, domestic courts provide inadequate protection for sovereigns facing the threat of default.  Furthermore, the non-comprehensive system of international debt—most notably including the guidelines established by the IMF and specific innovations like the Brady Bond, but also including national courts intervention and voluntary associations for the facilitation of collective action—is too easily bypassed. 

The outcome of a restructuring under the non-comprehensive system is a messy renegotiation of debt between creditors and debtors. Once renegotiations are finished, creditors are typically re-issued bonds structured differently or worth up to 70 percent less than the face value of bonds originally held. However, this fragile ad hoc system falls apart when vulture funds, which domestic courts like those in the United States have supported through various judicial decisions, exploit its weaknesses by refusing to submit to any meaningful negotiations with sovereign debtors and undermining the debtor’s efforts to restructure the debt.

The shortcomings of a non-comprehensive system are all too clear, especially considered alongside the fact that many defaulting countries must undergo the restructuring process more than once to address some unforeseen or unaddressed factors. Argentina, Belize, Greece, Grenada and Jamaica all experienced two or more restructurings of their debts due to the unsustainability of previous restructurings. Given the messiness and expense, these subsequent restructurings are particularly disruptive to developing economies.

Steady and persuasive international guidance is needed as unilateral efforts to pass legislation to curb the appetites of holdout creditors are stymied time and again. For example, the 2009 “Stop Very Unscrupulous Loan Transfers from Underprivileged countries to Rich, Exploitive Funds Act” died in committee in the United States. And while it is true that a handful of countries, including the UK and Belgium, have been able to pass domestic provisions that address sovereign bankruptcy, the international nature of sovereign debt combined with the domestic limit of those laws undermine such efforts.

The treatment of sovereign debtors has been reduced to that of mere commercial entities by vulture funds.

For the most part, international or multilateral legal avenues for sovereign bankruptcy currently in use can only be described as lacking. The IMF’s 2001 comprehensive Sovereign Debt Restructuring Mechanism failed to gain enough support from IMF members, led by the United States, who were uncomfortable surrendering enough sovereignty for the plan to work. Instead, the IMF threw its support behind Collective Action Clauses (CACs), contractual provisions intended to induce creditors to submit to majority rule in the case of default. To this end, sovereign debt contracts are now being written to anticipate holdout creditors by including CACs and other provisions, but this does little to help those countries currently undergoing proceedings, nor does it do much to legitimate the ad hoc system as it is. This maintained illegitimacy along with the incredible ferocity and creativity of holdout creditors, makes it seem unlikely that this type of contractual safeguard alone will provide the kind of stability in sovereign debt that is so needed. A 2013 IMF report indeed claims that this piecemeal plan is “too little, too late,” and that the problems fundamental to collective action are too large to overcome without a comprehensive framework.

Among the newer developments in international response to sovereign debt, and with the aim of default prevention, the IMF developed the Sovereign Debt Adjustment Facility (SDAF), a so-called comprehensive framework designed to stand alongside CACs, to prevent the Fund from entering into countries where debt is indeed unsustainable, and to protect countries undergoing restructurings from holdout creditors. On a more limited scale, the European Stability Mechanism couples lending limits with defensive contractual requirements for sovereign debt acquired by countries within the Eurozone. Such comprehensive mechanisms represent promising developments in stabilizing the processes of sovereign debt and default.  

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What brought all this to a fever pitch was Argentina’s default in August. Because of the U.S. Supreme Court’s decisive blow rejecting Argentina's appeal of the mandate requiring the country to pay certain vulture funds the full value of the original debt plus interest and fees, Argentina defaulted and its debt holders who negotiated their contracts in good faith did not receive payments.

The unlikely shared position of the ICMA and the UN is a reaction to the vulture funds moving further and further away from established modes of operating in the international system, enabled by domestic courts. Indeed, on September 9, when a vast majority of the UN General Assembly voted to engage the issue, it broke with a long-standing tradition: that only the specialized bodies of the international system deal with economic matters. The UN Human Rights Council has now also engaged economic rights as Human Rights, and is concerned with the fact that a sovereign default can have a negative effect on populations within a defaulting country. In addition, several of the specialized economic bodies of the international system, including the IMF, have responded with the development of new guidelines to help prevent default situations like Argentina’s.

As part of any new comprehensive framework, the prevention of the type of litigation undertaken by vulture funds will be of the utmost importance. The standard use of CACs, whereby a majority (normally around 60 percent) of the debt holders are able to negotiate conditions for the debt restructuring, would be a positive development. With this, even if a small number of creditors disputed the negotiation, creditors would be paid at the same rate and no holdouts would be allowed. The problem of a small minority of debt holders, like the 7 percent of holdouts we saw in Argentina, going to extreme lengths and thwarting economic recovery in vulnerable nations would be avoided. Additionally, further measures should be taken for both the prevention of sovereign default and the protection of creditors and debtors. 

The lesson of this rare convergence of regulatory action is clear: vulture funds are a problem to be taken seriously. They threaten capital markets and the economic stability of many countries—and in doing so put the entire international economic system at risk.