The UN General Assembly passed an historic resolution on September 9 this year to commence negotiations for a treaty for a bankruptcy process for sovereign nations. The vote was 124 in favour, 11 against, and 41 abstentions. All developing countries present voted in favor. Most EU nations abstained. Among the 11 countries to vote against were the US, UK, Japan, Germany, Canada and Australia – none of these were on the side of the angels.
Civil society groups worldwide are hailing this vote as the first step to rein in vulture funds. Vulture funds buy the sovereign debt of poorer nations at deep discounts and sue to recover the debt’s full face value. In the recent US case of NML Capital v Argentina, NML bought Argentine debt for 20 to 25 cents on the dollar and has spent years suing to recover one hundred cents on the dollar.
Yet Argentina is only back on its feet today because a decade ago the world’s leading commercial banks recognized it was then bankrupt and agreed to take a massive haircut of over 60 percent on their loans to the nation.
Vulture funds are well named as their behaviour is amoral. The lenders with the strongest claim to repayment are those that lent the full amount to Argentina in the first place not those that bought it later for a small fraction of its face value. The US court decisions siding with the vulture fund imperil all future sovereign debt restructuring. Why would any creditor now agree to a substantial haircut on their debts when if they simply hold out, they may eventually recover the full face value of the debt?