Starving the Vultures: NML Capital v. Republic of Argentina and Solutions to the Problem of Distressed-Debt Funds
Sovereigns, like individuals and firms, assume debt. Unlike individuals and firms, however, sovereigns cannot die and cannot declare bankruptcy. As such, a country’s ability to restructure its obligations in the face of severe financial turmoil is paramount to the smooth functioning of its domestic economy, as well as the overall global economy.
Most sovereign creditors willingly work with sovereigns to restructure debt in the face of default. However, distressed-debt funds, often referred to as “vulture funds,” purchase sovereign debt at a discount on the secondary bond market and litigate against the sovereign country to compel a judgment or settlement for up to the full value of the bonds. Such distressed-debt funds have pestered Argentina since its $100 billion default in 2002. Although 93 percent of Argentina’s bondholders restructured their debt, a small group of holdouts chose to litigate to recover the full value of their bonds. Argentina exhausted its appeals and the vulture funds have won a judgment in the United States entitling them to over a billion dollars. As of August 2014, Argentina has refused to pay the vulture funds and has entered a technical default.
This Comment tracks the litigation in NML Capital v. Republic of Argentina, and discusses potential institutional, statutory, and judicial solutions to the problem of vulture funds. Furthermore, the Comment attempts to demonstrate that the reasoning underpinning the Second Circuit’s decision to uphold the district court’s judgment, namely, that the judgment will not undermine future debt restructuring efforts, is based on the flawed premise that nowcommonly utilized Collective Action Clauses (CACs) will prevent vulture funds from holding out in the future. Rather, after NML Capital, the recent proliferation of CACs in sovereign debt instruments could actually stymie future restructuring efforts, as bondholders’ rational interests prompt them to sit out of restructuring attempts and possibly litigate to collect a greater amount. The vulture fund problem highlights a tension between unyielding adherence to the rule of law and moral concerns for the economic well-being of developing, semi-developed, and developed countries alike. The situation reveals the muddled shades of gray between strictly upholding the rule of law, which thereby promotes the largely unproductive and malignant behavior of distressed-debt funds, and massaging the rules to help Argentina and its people escape potentially severe economic suffering, which could promote irresponsible sovereign behavior and undermine courts’ vital commitment to upholding the rule of law.