To Pay or Not To Pay? An Economic Analysis of the Belgian Law Against Vulture Funds.

Abstract

Vulture funds have turned an orderly, cooperative debt restructuring process into a litigated, uncooperative conflict, inflicting harm on the economic health of financially distressed countries and consenting exchange bondholders. The ratable payment interpretation of the pari passu clause, that requires the payment of all creditors or none, has strengthened their legal position. So far, the various strategic, international, institutional, contractual, judicial and national legislative anti-vulture proposals have proven ineffective remedies to overcome the collective action dilemma that characterizes the secondary market. The novel approach of Stakeholders’ Action Clauses has not yet been included in bond contracts, nor can be applied retroactively. The recent Belgian Vulture Law, however, allows countries under attack of vulture funds to make payments to exchange bondholders via clearing houses in Belgium without the risk of attachment. Nevertheless, the new Argentine government decided to end the legal battle and pay the vulture funds. While the decision has been criticized as a precedent that will create negative spill-over effects to other countries and disrupt the orderly restructuring of sovereign debt for many decades, it has made holding out a rational strategy for all bondholders, who are no longer willing to settle, nor to sell to vulture funds at discounted prices. As such, it may mark the end of speculative hedge funds preying on vulnerable bondholders of countries in financial distress.