To Pay or Not to Pay? Evaluating the Belgian Law Against Vulture Funds

Abstract

Vulture funds are a grave problem for sovereign debt markets. Their uncooperative behavior delays the resolution of sovereign debt crises, inflicting harm on the economic health of financially distressed countries and consenting exchange bondholders. The unconventional ratable payment interpretation of the pari passu clause has strengthened their legal position. Various strategic, contractual, national and international remedies have so far proven ineffective.

The most recent initiative, the Belgian Law Against Vulture Funds, establishes a variant of champerty by granting vulture funds nothing more than the purchase price, while allowing countries under attack of vulture funds to make payments to exchange bondholders via clearing houses in Belgium without the risk of attachment.

This paper describes the Belgian anti-vultures law and its implications. We claim this law goes in the direction of improving the workings of sovereign debt markets. However, the Belgian bypass may lead to contempt of court in other jurisdictions, making it a costly and risky option for distressed countries. To be effective, the Belgian law should be part of a multilateral convention or adopted in other countries as a model law. Either way, it proves the need of an international framework.