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The virtue of vultures: distressed debt investors in the sovereign debt market.

In the world of investing, vulture investors are those who buy distressed assets, almost invariably debt obligations, and then attempt to profit by either selling those assets at a higher price or by entering litigation against the debtor to extract a profitable return on the purchased assets. These vulture investors, or more charitably, "distressed-debt" investors, are almost always organized as some kind of hedge fund and come in two essential forms, domestic and international. The domestic vulture investor focuses on the obligations of firms, while the internationally-focused vulture speculates in the debt of sovereign issuers. This article focuses on vultures operating in sovereign debt and has two primary goals, first, to explain how vulture funds operate, and second, to consider the social value of their activities. In sum, the article concludes that vulture funds provide a valuable function in international debt markets, contrary to the pronouncements of some governmental spokesmen, international financial institutions, the established view of many NGOs, and the moralizing of many who advocate for relief of the poor.

The remainder of this article is organized as follows. Section I reviews the basic operations and commercial strategy of vulture funds, while Section II briefly surveys the legal framework within which sovereign lending proceeds. This legal environment constitutes the social space in which vulture investors operate. Section III presents the main arguments against vulture investing, and Section IV offers a rebuttal of all the claims made against vultures. Beyond mere rebuttal, Section V makes a positive case for the value of vultures and argues that the self-interested pursuit of vulture investors throws off benefits to other bond investors, to sovereign borrowers, to the sovereign debt market, and to the debtor's society and the society that hosts the sovereign debt markets where nations borrow. Section VI concludes.

I. The Basic Operations of Vulture Funds

Since earliest times, sovereign governments have borrowed funds from the public for a variety of reasons, foremost among these being to acquire funding to wage war. In contemporary times, governments also borrow to undertake presumably worthwhile infrastructure projects and to finance a higher level of consumption than their contemporaneous tax revenues can support. Lenders to governments include other governments and their agencies, multilateral organizations, and the public, which includes both firms and individuals. To secure these funds, sovereign borrowers promise to repay the borrowed funds with interest.

In the early twentieth century, sovereign borrowing occurred mostly through the flotation of bonds in London and New York, with the prime market being initially London. With the economic ascendancy of the United States, New York became the dominant center for issuing sovereign bonds. After the Great Depression and World War II, the bond market was gradually supplanted by international banks. Lending by this method usually involved a consortium of large banks, a syndicate, that organized very substantial loans to sovereigns with participation by many banks. Participant banks were principally large banks operating in the international arena, but smaller "country banks" also played a minor role in many syndicates as well. After the debacle of the Latin American debt crisis of the 1980s, in which many large international banks became essentially insolvent, the principal form of sovereign lending again became the flotation of sovereign bonds. (1)

The entire history of sovereign borrowing has been accompanied by frequent sovereign defaults and "restructurings." A debtor defaults when it fails to pay as promised, and the severity of a default can be as minor as a "technical" default that occurs when a single payment is merely a day late. At the other extreme a debtor can simply repudiate a debt and refuse all payments to its creditors. Sovereign debtors very seldom simply refuse to pay. Rather, they typically insist that they are unable to pay as promised and seek to restructure their payments, and this effort to restructure can come before and even in lieu of an actual default, or the sovereign can default and then seek a restructuring agreement with its creditors. In a restructuring the sovereign borrower makes a new promise to pay according to a new schedule. Invariably the newly-promised restructured payments consist of a stream of payments with a lower net present value than the originally promised sequence of payments. This can be accomplished by lowering the coupon rate, lengthening the maturity schedule of payments, or reducing the principal balance, as well as by a variety of more sophisticated technical financial maneuvers. The key element of a restructuring is that the sovereign seeks to make a sequence of payments that is worth less than the payments it promised initially.

Not surprisingly, bond investors find such a new plan disappointing. Nonetheless, in many cases, bondholders acquiesce in the new arrangement. Sometimes the bondholders realize that the debtor government really is unable to pay as promised due to the occurrence of some natural disaster, changes in the value of the country's exports, or political instability. In these cases, agreeing to a restructuring merely accommodates an inescapable new reality. In other situations, the issuing government may simply decide not to pay fully according to its promise, calculating that the bondholders lack effective means to force full payment. Thus, some restructurings arise due to the sovereign's "inability to pay," but at least sometimes the default and subsequent restructuring arise due to the sovereign's "unwillingness to pay."

According to many commentators, there was once an era of "gunboat diplomacy," the idea being that the creditor's government would use its military might or threat of intervention to force a recalcitrant government to pay as it promised originally. Others doubt that there was ever really such an era, and maintain that the very few historical interventions that actually occurred were aberrations or were the result of a nation pursuing some geopolitical objective other than trying to make a foreign government pay its bondholders. (2) At any event, there certainly is no longer any threat or use of military force to secure payment by incapable or recalcitrant debtor governments. Thus, one of the persistent difficulties in the theory of sovereign debt is explaining why sovereigns ever do repay. As a correlative, if sovereigns have little incentive to repay, then prospective bondholders should have a corresponding reluctance to lend. According to many accounts, reputational concerns play a critical role, and sovereigns repay in order to be able to borrow in the future. Other theorists emphasize the importance of sanctions. The ultimate sanction of military force may no longer be practically available, but trade restrictions and exclusion from future borrowings may constitute sanctions that can effectively encourage sovereigns to pay. Much of the theory in this area remains unsettled, leaving the motivation that prompts obviously large amounts of lending and sovereign repayment incompletely understood.

Against this background, the vulture investor attempts to make a profit by speculating in the distressed debt of a sovereign issuer. In the ordinary event, the vulture investor buys the defaulted bonds on the open market and initiates legal proceedings in the hope of compelling full payment, or at least inducing the sovereign to settle the suit in a way that provides the vulture a profit that amply rewards the investment, high risk, litigation costs, and delayed payment that such a venture entails. Given the relative power of a sovereign state compared to a hedge fund, it is not surprising that success by the vulture is quite perilous. Very often vultures succeed in winning court verdicts, but find actually collecting judgments much more difficult.

II. Key Legal Elements of Sovereign Lending

Laws regarding sovereign debt have evolved over centuries and are quite complex. Further, laws vary by jurisdiction. However, a few legal essentials are key to understanding the operation of vulture funds and to assessing the legitimacy of vulture investing. Over the long sweep of history in the West, sovereign nations have been regarded as possessing absolute sovereign immunity, embracing both immunity from suit and immunity from execution. "Protections concerning immunity from suit derive from the international principle that a sovereign should not be made to suffer the indignity of being hauled into court against its will. Immunity from execution provisions stem from long-standing concerns about the disruptions and political ramifications that can result from the seizure of a foreign state's property." (3)

This theory of absolute sovereign immunity generally prevailed until the late 19th century, but the scope of sovereign activities has expanded from the core elements of defense and internal administration into activities quite distant from these essential functions of governments, such as various kinds of commercial endeavors. The twentieth century witnessed a growing reluctance by many governments to extend the scope of absolute sovereign immunity to relatively adventitious activities of other national governments. The Committee of Ministers of the Council of Europe adopted the European Convention on State Immunity in 1972, and it came into force in 1976. This convention excluded a variety of state activities from the protection of sovereign immunity. Most notable among these activities for vulture investing was the exclusion of a sovereign government's commercial activities in the territory of another state. (4) In 1976 the U.S. Congress passed the Foreign Sovereign Immunity Act (FSIA), which included a specific exception to absolute sovereign immunity for the commercial activities of a sovereign government. The British State Immunity Act of 1978 included similar features, and the general structure of law across western Europe quickly came to embody the same outlook. (5)

Almost without exception, sovereign borrowing is now subject to the laws of the country in which the debt is issued, and because almost all sovereign borrowing is conducted in the financial centers of western countries, most notably in New York and London, virtually all sovereign debt became fully subject to the courts of these western nations. In the light of the legal environment created by the FSIA and parallel laws in other nations, almost all sovereign bond covenants include an explicit waiver of sovereign immunity, meaning that disputes about the debt are subject to the laws of the country in which the debt is issued, rather than in the courts of the issuing sovereign.

Much litigation surrounding sovereign debt turns on clarifying what counts as the commercial activity of a sovereign state. In 1992, in Republic of Argentina v. Weltover, the U.S. Supreme Court ruled that the issuance of sovereign debt was a commercial activity and consequently no longer protected by the long tradition of absolute sovereign immunity. The success of vulture fund litigation depends largely on finding assets of defaulted nations that are outside the debtor's frontiers and subject to attachment. Alternatively, the vulture needs to impose costs on the sovereign debtor sufficient to induce the sovereign to settle with the vulture.

As a longstanding element of English common law, the doctrine of champerty forbids the acquisition of a debt solely for the purpose of bringing a lawsuit to collect the debt. Stated as such, this principle might appear to frustrate the vulture's entire business model. Peru raised a champerty defense against a vulture fund and was sustained initially. However, that verdict was overturned on appeal on the grounds that the vulture's intention was to be paid in full or, failing full payment, to sue. Thus the vulture's intention in acquiring the debt was not solely to be able to initiate a suit. Other courts have accepted that ruling. Further, some vulture funds successfully lobbied for an explicit law that would protect their business model. In 2004 the New York state legislature acted to amend N.Y. Judiciary Law 489. This amendment essentially eliminated the defense of champerty in matters exceeding a value of $500,000. (6)

Most sovereign debt contracts also contain a pari passu (or an equal footing) clause, in which the debtor essentially promises that the given obligation will not be subordinated to any other relevantly similar security. A typical construction of the clause embodies language such as "The bonds and the coupons are direct, unconditional and unsecured obligations of the issuer and rank and will rank at least pari passu, without any preference among themselves, with all other outstanding, unsecured and unsubordinated obligations of the issuer, present and future." (7) The pari passu clause constitutes a key weapon in the vulture's legal arsenal, because it prevents a debtor in distress from reaching a restructuring agreement with other creditors, paying them, and withholding payment from the vultures who hold out for full payment. On one common interpretation, the clause means that any payment to one creditor must be matched by pro rata and non-discriminatory payments to other creditors, such as a vulture fund. (8)

Most sovereign debt contracts have typically required essentially unanimous agreement by all creditors in order to complete a restructuring. The sovereign debtor cannot unilaterally change the terms of its repayment schedule, and the ability of the vulture to withhold consent and demand full payment provides a key point of legal leverage against the debtor. Faced with this situation, a number of policymakers have sought to weaken the vulture's position by making it easier to organize a restructuring for a troubled debtor. Some, including the International Monetary Fund (IMF), have advocated the development of a Sovereign Debt Restructuring Mechanism (SDRM), which would essentially amount to a bankruptcy regime for sovereign debtors that would mirror the Chapter 11 provision of U.S. bankruptcy law. This initiative gave rise to a lively debate, but the idea seems to have atrophied, particularly as a more market-oriented way to address the issue has come to the fore. (9)

A second line of attack for avoiding what has amounted to the necessity of universal consent among creditors is the development of sovereign debt contracts that include a "collective action clause" (CAC). A CAC is a clause in the sovereign debt contract that allows a supermajority of creditors to change the contract terms for all creditors. Under a CAC, for example, 85 percent of the creditors might agree to a restructuring, and with that supermajority the agreement would bind all creditors. In recent years, with the idea of an SDRM falling by the wayside, most new sovereign debt issues include some kind of CAC. (10) A CAC essentially puts the vulture investor out of business. Most even mildly responsible restructuring offers receive strong majorities, so the vulture would be forced to accept the common terms once a sufficient majority of bondholders agree to a new restructuring. While CACs may impede vultures in the future, there are many extant bonds that have no CACs, so the vultures will have potentially attractive carrion for years to come.

One last feature of sovereign bond contracts is particularly relevant to vulture investing, and that is the existence of an "exit consent." In the absence of a CAC the sovereign debtor cannot change the promised payment terms even with the agreement of a very high percentage of the creditors. However, bonds with exit consents can allow the debtor and a sufficient number of its creditors to change other provisions of the bond contracts that do not specifically affect the promised payment stream, but that can radically affect the value of that promised sequence of payments. When a creditor agrees to a restructuring, she exits the old agreement, surrenders her previous bonds, and consents to accept the newly issued restructured bonds. For example, a bond contract might allow a debtor and a supermajority of creditors to set aside the pari passu clause of the contract. This would pave the way for discriminatory payments in favor of the creditors who are agreeing to a restructuring and against holdout creditors. (11) In that situation, a holdout creditor could go on demanding his rights in courts, perhaps winning judgments, but never actually being able to force collection. The sovereign debtor could just ignore the holdout creditor who had won legal claims but was powerless to enforce those claims against the might of a state willing to remain in contempt of the law. Also, an exit consent might change the venue for the law governing the bonds from, say, New York, to the debtor's own country. Even though these changes do not themselves directly affect the promised stream of payments, they make the vulture's position much less tenable. Faced with such a maneuver, the vulture might feel compelled to salvage whatever value is possible by tendering his bonds and accepting the restructuring.

The first and perhaps the most instructive example of using exit consents to accomplish a restructuring was provided by Ecuador in 2000. Ecuador was able to restructure $6.8 billion of face value, achieving a 40 percent reduction in present value of its obligation and garnering a 97-99 percent participation rate. (12) Uruguay and the Dominican Republic used a similar tactic in 2003 and 2005, respectively. (13) In spite of Ecuador's example, there has been no particularly extensive use of exit consents since, and collective action clauses seem to have become the dominant method of contract design used to isolate and intimidate prospective holdouts. (14)

III. The Case Against Vulture Investors

The first charge to consider against vultures is one of greed. As the Nobel laureate Joseph Stiglitz puts the charge: "The vulture funds have raised greed to a new level." (15) What offends is the very business model of the vulture--to accumulate defaulted debt on the cheap and then to seek a profit through litigation. Similarly, former British Chancellor of the Exchequer and former Prime Minister Gordon Brown has called the vulture funds' activities "morally outrageous" and "perverse." (16) Speaking in another context, Brown made the charge more explicit: "I deplore the activities of the so-called vulture funds that seek to profit from debts owed by the poorest countries in the world. I am determined to limit the damage done by such funds." (17)

Closely allied to these expressions of moral outrage is a more sophisticated charge--that the behavior of vulture funds offends against distributive justice. By seeking payment from governments in developing countries, vulture funds hope to take monies from those who need those resources much more desperately. For example, in one well-known instance, Zambia had borrowed from Romania to purchase tractors and later defaulted on that debt. The vulture fund Donegal purchased the debt from Romania and sued Zambia for payment. Donegal was suing Zambia just at a time the latter was receiving debt relief under the Heavily-Indebted Poor Countries (HIPC) relief effort, leading one anti-vulture activist, Caroline Pearce, to say: ""Profiteering doesn't get any more cynical than this. Zambia has been planning to spend the money released from debt cancellation on much-needed nurses, teachers and infrastructure: this is what debt cancellation is intended for, not to line the pockets of businessmen based in rich countries." (18)

In fact, it is not unusual for vulture funds to sue impoverished nations. Eleven of 24 HIPCs have been sued by private creditors. (19) Similarly, the World Bank estimated that more than one-third of the HIPC countries had been targeted by vulture funds and had been awarded approximately $1 billion in court settlements. (20) The head of Oxfam's legal team complained: "We believe that vulture funds should be outlawed. They undermine debt relief initiatives and the financing of essential services such as health and education on which poor people depend." (21)

Beyond the charge of greed and impeding distributional justice, Joseph Stiglitz also asserts that the present regime of vulture litigation misplaces the fault for failed debt arrangements: "In debt crises, blame tends to fall on the debtors. They borrowed too much. But the creditors are equally to blame--they lent too much and imprudently. Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them." (22) There are at least two ways of thinking about a failed debt issue and its accompanying default. First, one might view it simply as a commercial arrangement that fails for some unanticipated reason, but lacks any particular moral dimension. For example, a country might borrow money for an infrastructure project such as a hydroelectric dam, expecting the revenues from the sale of electricity to provide the cash flow to service the loan. Such a project could fail for any number of reasons--unanticipated cost overruns, poor management, or simply reduced flow of water to the dam caused by climate change. Many investments fail when there is no specific moral fault to explain the failure. However, Stiglitz's argument does seem to imply a moral failing, and he finds it more appropriate to attach the onus to the lender rather than the borrower.

Vultures are often faulted on grounds of unfairness to other bondholders, and this charge takes two related forms. First, some allege that the vulture is a free-rider on the sacrifice of the bondholders that accept the restructuring. Second, some maintain that the vulture obtains preferential treatment for itself at the expense of other bondholders. According to these arguments, the vulture is a free rider because the sacrifice of the other bondholders in accepting the restructuring frees funds that are then available to pay the vulture. The Paris Club (23) makes this point: "Public attention has recently focused on the behaviour of creditors resorting to aggressive litigation tactics against heavily indebted poor countries (HIPC). These actions free ride on the debt cancellation granted by other creditors and thus divert resources from poverty reduction expenditures in the debtor country." (24) Many of the world's poorest nations are unable to attract private financing and have been unable to issue bonds through commercial channels. These countries borrow mainly from the governments of Paris Club nations. To deal with what they see as the potential problem of vulture investors, the Paris Club has acted to attempt to hold its claims off the market: "In particular, consistent with the Paris Club principle of comparability of treatment and taking stock of the harmful consequences of litigation for HIPC countries, Paris Club creditors confirm that they are committed to avoid selling their claims on HIPC countries to other creditors who do not intend to provide debt relief under the HIPC initiative, and urge other creditors to follow suit." (25) If these nations are the only creditors for an HIPC and they refuse to sell their claims to vultures, then there would be no problem of a vulture investor for that particular HIPC. If this were generalized, then vulture investing would be confined to the sovereign debt of only relatively wealthier nations.

While these charges of immorality--greed, failings of distributive justice, misplaced moral fault and unfairness by free-riding and seeking unfair preferential treatment over other bondholders--have led to the most passionate charges against vulture investors, the literature against vultures has concentrated on perceived problems with the social efficiency of a legal and financial framework that allows vultures.

In a typical sovereign default and restructuring, the debtor country finds itself unable (or in some cases, merely unwilling) to pay as promised. After the default, the sovereign will offer to replace the defaulted bond with a restructured bond with less generous payments. In many cases, the IMF will mediate this process. In doing so, the IMF will provide some new financing to the debtor nations and impose conditions on the country's economy, which are designed to help the debtor nation grow, to be able to pay on the restructured bond as promised, and to repay the IMF for the funds it advances. As part of this process, the IMF moves to the front of the line of creditors and the nation promises to repay the IMF no matter whether it can pay the other creditors. In essence, this process is referred to as an "orderly restructuring" in much of the discourse promulgated by the IMF, governments, and other international financial institutions.

In the process of restructuring, the debtor nation will try to get a large majority of its creditors to agree to the restructuring. If a creditor agrees, it tenders the original and defaulted bond and accepts the restructured bond in lieu of any claim associated with the defaulted bond. However, some of the original bondholders will refuse to accept the restructuring and those bondholders, or holdouts, sometimes sell their bonds to a vulture fund. If the vulture holds only a very small percentage of the bond issue, then the sovereign may simply choose to pay off the vulture to resolve its problem and proceed with an otherwise orderly restructuring. In this case, the vulture presents a very minor problem and cannot really disorder the restructuring to any serious extent. At least one economist who sees the problem represented by vultures as very minor thinks that rather than likening these distressed debt investors to a vulture, a mosquito provides a better metaphor. (26)

However, some fear that the successful rare vulture (or mosquito) might encourage other creditors to hold out with the result that too few bondholders would accept the restructuring and that this could prevent a meaningful and orderly restructuring. If this were to happen, the debtor country would have much more difficulty in resolving its financial problems. These unresolved debt difficulties could also impede economic growth in the debtor country and cause serious welfare losses to an entire society. Nouriel Roubini puts the point succinctly: "If a holdout creditor can choose not to accept the offer and then, through later litigation, receive the full amount of its claim while those who accepted the offer receive less, a strong incentive arises for creditors to hold out. If this creditor coordination problem cannot be solved, a disorderly workout will result, even if a cooperative solution would be in the interest of all creditors." (27) As noted earlier, this fear of vultures has been responsible, in part, for the advent of CACs in almost all recently initiated sovereign debt contracts.

As noted earlier in this article, the United States has become the main market for sovereign debt, with most sovereign debt being issued under New York law. Courts in the United States have very frequently sided with vulture investors against sovereign debtors. For example, in 2001 Argentina defaulted on almost $100 billion of its sovereign debt. In litigation against Argentina, vultures have triumphed in every one of a sequence of ever higher courts, culminating in the Supreme Court of the United States in June 2014. (28) Some critics of vultures argue that the propensity of U.S. courts to side with vultures could lead to a situation that is harmful to the interests of the United States. Referring to a 2013 U.S. appeals court decision favoring vulture investors over Argentina, Joseph Stiglitz opines: "A recent decision by a United States appeals court threatens to upend global sovereign-debt markets. It may even lead to the US no longer being viewed as a good place to issue sovereign debt. At the very least, it renders non-viable all debt restructurings under the standard debt contracts." (29) Thus Stiglitz claims that vultures not only harm the debtor nation, other holders of defaulted bonds, but that they can also hurt the economy of the United States.

In sum, the attack on vultures takes many forms, with a mix of moral arguments as well as objections that focus more strictly on economic welfare. Not only are vultures greedy, but they are rich and take money from those who are poor, thereby offending against distributive justice. The successful vulture punishes the debtor, when the real fault lies with the lender. In addition, the vulture is a free rider who exploits other bondholders by seeking preferential treatment over them. As a second major class of arguments, the vulture harms social welfare by interfering with an orderly process of restructuring. As a consequence, the vulture impedes economic growth in the debtor nation trying to recover from its default. Finally, the vulture investor harms the market for sovereign debt generally, and because the market is concentrated in New York, the activities of vultures harm the economic well-being of the United States.

IV. Rebuttal of the Arguments Against Vulture Investors

As we have seen, vulture funds speculate in the market for sovereign debt and advance their claims through litigation. They are commercial ventures seeking to benefit their clients financially. As such, they are "greedy." But this greed is the typical and proper function of commercial enterprises. Further, virtually all humans are greedy in the sense of seeking their self-interest in a significant portion of their activities. Viewed in this context, the accusation of greed is merely the casting of aspersions without content. Further, even well before Adam Smith's Wealth of Nations explained in detail how the pursuit of self-interest can have ancillary benefits to others, many others had recognized this important truth. The next section of this article argues that the self-interested and greedy behavior of vulture funds creates substantial social benefits.

Critics also allege that vulture funds offend against principles of distributive justice by seeking to profit from the governments of poor countries. It is true that vulture funds do advance many of their claims against both low- and middle-income countries. This charge against vulture funds is problematic in several ways. First, the attitude is patronizing and demeaning to the debtor countries and their governments. If governments are capable of floating bond issues in the sovereign debt market, then they should be responsible enough to fulfill the commitments they undertake in doing so. In the event that they cannot honor their obligations, they should be able to accept the legal consequences of their failures. To presume otherwise infantilizes those governments. Is it really the position of these critics that poor countries should be excused from fulfilling their promises because, in virtue of being poor, they are somehow less than fully capable of functioning in a responsible manner? Second, critics charge that vulture funds are rich businessmen seeking to line their pockets by exploiting the poor. This is not factually correct in many cases. Prominent managers of vulture funds are often wealthy, but their investors are not necessarily wealthy at all. Mutual funds, pension funds, and other financial institutions are often the direct investors in sovereign bonds, and this is particularly true of pension funds. (30) Third, the legal system actually is one of the key mechanisms by which developed society resolve claims of distributive justice and the legal system partially expresses a society's determination of the just allocation of resources. By using the legal system, vulture funds merely utilize the accepted system for adjudicating issues of distributive justice. Such systems are not beyond criticism, of course. But complaints about distributive justice might more suitably be directed against the legal system, not the vulture funds that operate within the norms that societies constitute. Note to author: Your critique is excellent. You might also consider discussing whether international lending (such as by the World Bank) to "poor countries" is actually intended to be a disguised form of foreign aid. This editor has long suspect it is, but doesn't really know. This question no doubt has some relation to the point you make below about many countries' feeling that the loans are a way of quasi-colonizing those countries.

We have seen that Stiglitz believes that the moral censure for a failed sovereign debt issue should more appropriately be attached to the lender rather than to the borrower--especially because the lenders are supposed experts in risk analysis. This argument is flawed on three grounds. First, in today's modern sovereign debt market, many of the original lenders are portfolio investors such as mutual funds, pension funds, and so on. Contrary to Stiglitz's assertion, such investors have no special expertise in evaluating the risk of countries and the purposes for which they plan to employ the funds they raise through their sovereign debt issues. Second, there is a deeper problem with Stiglitz's view. His argument seems to hark back to a Victorian model of moral guilt for bankruptcy or default. A more modern understanding of failed investments does not necessarily include moral censure. If funds are borrowed and the associated investment is carried out with diligence and honesty, then moral censure for the failure may not be appropriate at all. Third, Stiglitz's complaint does not really apply to the vulture investor at all. By its very nature, the vulture investor is never the original lender, but comes on the scene only after the debt issue fails or starts to fail. As a consequence, Stiglitz's desire to blame the lender rather than the borrower is completely irrelevant to the vulture investor, because the vulture was neither the borrower nor the lender.

A leading complaint against vulture investors charges them with interfering with the orderly restructurings of defaulted debt issues. The main voices for these complaints are the international financial institutions that desire to govern the restructuring process--the IMF, and in the more recent Eurozone debt crisis the European Stability Mechanism (ESM). When such institutions step into a sovereign debt crisis, they want to control the process, including imposing conditions on the management of sovereign economies. Also, and quite importantly, they insist on coming to the very front of the line of the country's creditors. Not surprisingly, then, they find vulture investors who insists on a debtor honoring its obligations to be a pesky nuisance. At the very least, the institutional self-interest of the IMF and ESM calls into question their moral standing to seek to disenfranchise other creditors.

The ESM has had a short life to date, but the IMF has been involved in many restructurings and other financial crises for quite a few decades. In its history, it has done much to alienate many of the nations that it has presumed to assist. One of the most blistering statements of such a view was provided by Dr. Mahathir bin Mohamad, Prime Minister of Malaysia, in a 2001 interview. Speaking of capitalism generally and with clear reference to the IMF in particular, Mohamad said: "In the old days you needed to conquer a country with military force, and then you could control that country. Today it's not necessary at all. You can destabilize a country, make it poor, and then make it request help. And [in exchange] for the help that is given, you gain control over the policies of the country, and when you gain control over the policies of a country, effectively you have colonized that country." (31) While Mohamad's articulation of the complaint against the IMF is especially clear, his view is shared by many others who view international financial institutions generally, and the IMF in particular, as agents of colonizing powers and as tools that rich nations use to maintain hegemony over poorer nations. (32)

Complaints against the motives and power of the IMF are not limited to voices from developing countries, by any means. The IMF has often been seen as the agent of large commercial banks in rich countries. On this analysis, the IMF enters a debt crisis when a sovereign cannot pay its western bankers. It then funnels public monies to the debtor nation and ensures that those funds are used to repay commercial bank lenders in full. Criticism of the IMF's behavior in the LDC debt crisis of the 1980s as well as in the Asian and Russian financial crises of the 1990s has been particularly virulent and lodged by very authoritative economists. For example, speaking of the LDC debt crisis, Harvard economist Jeffrey Sachs and John Williamson assert: "With the world's largest commercial banks holding claims on the debtor countries that typically exceed 100 percent of bank capital, debt by the leading debtor countries would threaten the solvency of these banks and push the world economy into treacherous and uncharted waters. The strategy of the creditor governments therefore coalesced around one principal goal: maintaining the servicing of commercial bank claims by the debtor governments." (33) With reference to the debt contracts involved in the Asian crisis of the 1990s, Joseph Stiglitz says "... the IMF and other developed-country lenders have done what they could to make sure that those countries that have entered into these unfair contracts fulfill them, whatever the costs to their people.... In effect, the IMF was bailing out the foreign lenders--putting their interests above those of workers and others in the developing country." (34) A full ethical consideration of these international financial institutions lies far beyond the scope of this article. However, there is good reason to at least regard their moral standing as suspect and to recognize their institutional self-interest in criticizing other sovereign creditors. Meanwhile, while pretending to occupy the moral high ground, the IMF muscles itself into the front of the line of creditors and prescribes economic policies to debtor nations. (35)

Although the IMF has been a leading critic of vulture funds, their own studies belie the significance of the charges they level. A 2012 IMF study asserts that in the 31 years from 1980-2010 there have been 112 new suits brought against sovereign defaulters. The report further acknowledges that these are clustered against Peru in the 1990s and against Argentina following its massive default in 2001. (36) In fact, there were 13 suits against Peru and 54 suits against Argentina, including 41 creditor suits and 13 class action suits. (37) Over this period, on average, there were only 3.6 suits per year, hardly a rate of litigation that could overwhelm courts or bring the sovereign debt market to a standstill. Even the IMF acknowledged: "Despite lengthy negotiations and delays in many debt restructuring cases, creditor coordination and holdouts have not generally been a major problem." (38) In a separate report, the IMF also acknowledged that "Inter-creditor equity issues and litigation have generally not been impediments to successful restructurings." (39)

A full consideration of individual debt issues and the litigation they have called forth is beyond the scope of this paper, but with 48 percent of all suits against sovereign debtors being directed toward Argentina, the problem of vulture disruption of the sovereign debt market hardly seems a realistic complaint. Further, Argentina represents a special case due to the enormous size and complexity of its default, along with the incredibly aggressive stance Argentina has taken toward its creditors. So egregious has the conduct of Argentina been in the view of many that it has been characterized as a "rogue debtor." (40) The full evaluation of Argentina's struggle with its creditors remains controversial, but two facts are particularly telling. First, Argentina lost its court battles with vultures at every level all of the way to Note to author: and including? the U.S. Supreme Court. (The U.S. Supreme Court refused to review the Court of Appeals decision, thereby letting the lower court's ruling stand.) Second, in its finding against Argentina, the U.S. Court of Appeals was led to characterize Argentina as a "uniquely recalcitrant debtor." (41) If we set aside Argentina as a special case, there were fewer than two suits per year lodged against sovereigns over the 1980-2010 period, a statistic that suggests vulture circumspection rather than a profligate tendency to sue.

Another charge against vulture funds is that they unfairly position themselves with respect to other private creditors and that they free-ride on the better behavior of those other creditors. Vulture investors really only come into play when a sovereign debtor is near or is in default. Faced with an imminent default, many bondholders anxiously head for the exits, trying to salvage whatever value remains in the bonds. They do this for a diversity of reasons. Some investors merely want whatever little immediate cash they can rescue from their failed investment. Perhaps more importantly in terms of the funds involved, the charters of some financial institutions prohibit the holding of distressed or defaulted bonds, and they have a fiduciary duty to liquidate those holdings. The vulture investor buys bonds from those sellers and refuses to participate in the restructuring. Meanwhile, other bondholders accept the restructured bonds and make that decision based on their own interests. The vulture merely stands ready to pay cash for bonds rather than leaving bondholders with participating in the restructuring or in holding out on their own by refusing the restructured offer. In doing so, the vulture benefits bondholders by providing them with a second avenue of realizing at least some limited value from their failed investment. In the dire circumstances of an impending default or a restructuring, different bondholders take their independent decisions. Some accept the bailout, but by refusing to tender its bonds, the vulture fund takes a big risk--the risk that the sovereign will successfully refuse to ever pay the vulture anything--and it does so in the hope that the decision may ultimately yield a profit commensurate with that risk.

When the various bondholders decide to sell their bonds to a vulture, to participate in the restructuring, or to hold out their bonds themselves in hope of a better deal, they act independently and in pursuit of their own perceived self-interest. Thus, none of the actors acts as a free rider on any of the others. Nor does any of these three parties achieve an "unfair" positioning relative to the others. Instead, all of the bondholders are caught in a terrible position, and each attempts to salvage whatever value it can by choosing a strategy that matches its beliefs about the future, its liquidity needs, and its taste for risk. By analogy, all three types of bondholders are like passengers on a distressed ship--some remain on the ship, others take to lifeboats, and some swim for shore. Note to author: excellent analogy. Like the passengers on a sinking ship, bondholders act independently, and none disadvantages the others. In deciding in favor of vultures and against the defaulting Argentine government, the U.S. Court of Appeals for the Second Circuit recognized this point precisely: "We believe that it is equitable for one creditor to receive what it bargained for, and is therefore entitled to, even if other creditors, when receiving what they bargained for, do not receive the same thing. The reason is obvious: the first creditor is differently situated from other creditors in terms of what is currently due to it under its contract." (42)

A final complaint against vulture funds charges that they threaten to harm the U.S. financial markets and economy by using the U.S. legal system to press their claims against a defaulting sovereign. The claim is that if U.S. courts demand that sovereigns recognize the claims of vulture funds, those sovereigns will prefer not to list their bonds in U.S. markets or under U.S. law. The effect of vulture litigation on sovereign debt markets is ultimately an empirical matter, so it is difficult to assess definitively in the abstract. However, the next section gives reasons to believe that courts that uphold creditor rights actually help the financial markets of their home countries. A U.S. federal appeals court certainly agreed with this argument in deciding in favor of vulture investors and against Argentina in litigation over its 2001 default: ".... we do not believe the outcome of this case threatens to steer bond issuers away from the New York marketplace. On the contrary, our decision affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms. We believe that the interest--one widely shared in the financial community--in maintaining New York's status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts." (43)

V. The Affirmative Case for Vulture Investors

As a starting point, let us begin with the key prima facie principle of pacta sunt servanda--promises must be kept. The vulture fund merely asks the sovereign debtor to pay its debts as it has promised. Of course, no one denies that there are circumstances in which a debtor is unable to pay as promised, but as a starting point, the vulture's request for payment possesses an initial moral presumption. Beyond this starting point, this section argues that the activities of vulture funds provide valuable services to other participants in the sovereign bond market. Further, there is good reason to believe that the presence of vulture investors in the market has beneficial effects on the sovereign debt market. Finally, a legal regime that offers strong protections to hold-out creditors throws off advantages to the entire market.

Vulture funds provide at least four direct services to other bond market participants. First, consider the hapless investor holding a greatly depreciated sovereign bond and wishing to dispose of it for cash. The vulture investor serves that bond investor by standing ready to purchase the bond. As such, the vulture provides the valuable service of increasing liquidity. (44) Second, by accumulating bonds, the vulture consolidates a number of bonds from a variety of small and some large investors. In doing so, it increases the demand for the defaulted bonds and thereby helps those investors salvage more value from their holdings than would otherwise be possible. Third, by consolidating these different claims, the vulture can help to make negotiations more efficient. With a vulture fund, the defaulting sovereign has to negotiate with fewer holdouts than would otherwise be the case. Fourth, some bondholders will refuse to participate in the restructuring and will not sell their bonds to a vulture fund. If the vulture can prevail in its efforts against the sovereign debtor, those other independent holdouts will likely be able to secure the same terms the vulture wins through its efforts. If the vulture succeeds through its expenditure of time, money, and effort, these independent holdouts capture similar benefits without bearing any litigation expense.

If the sovereign debt market were plagued by excessively frequent and capricious defaults, then lenders would be unwilling to lend, and the market would cease to exist. Therefore, for the market to exist there must be deterrents to default. While much of the theory of sovereign debt remains unsettled, there seem to be four different reasons that sovereigns repay: reputational considerations, the threat of sanctions for non-payers, avoiding costs outside the sovereign debt market that are concomitant with default, and a domestic political structure in the debtor's country that encourages repayment. Part of the reason that sovereigns repay is a desire to maintain their reputation as good payers so that they can borrow in the future and be able to borrow at lower rates. (45) However, there are strong arguments to suggest that reputational arguments alone are insufficient to explain the behavior of sovereign borrowers and creditors. (46) Many economists believe that inducing sovereigns to repay requires the threat of sanctions against potentially deadbeat sovereigns. At one time, "gunboat diplomacy" played at least a small role in inducing repayment. (47) Today, potential sanctions include restrictions on trade, refusal to extend further credit, threat of lawsuits, and so on. In addition, to reputational considerations and sanctions, some economists believe that sovereign defaults can entrain their own punishment in the form of reduced trade flows and slowing GDP growth, or even declining GDP. This third kind of cost to the economy accompanies sovereign defaults but occurs outside the sovereign debt market. Finally, it does seem clear that the degree of democratization and the form of the debtor's government play important roles in the actual repayment behavior of sovereign debtors. (48) For example, if powerful domestic interests are among the sovereign's creditors, there is a greater tendency to repay as promised.

Vultures contribute to the functioning of the sovereign debt market by providing an element of sanction to default, thereby raising the cost of default and helping to sustain the existence of the sovereign debt market. Because of the threat of sanctions (along with reputational loss and other economic problems that defaulting sovereigns suffer), the presence of vultures helps to accomplish three desirable effects: making contracts more credible, helping sovereigns obtain better terms when they do borrow, and even helping to increase capital flows to sovereign debtors. The threat of vulture lawsuits encourages sovereigns to honor their contracts, thereby making sovereign debt contracts more credible. By contributing to sanctions that defaulting sovereigns suffer, vultures help to reduce the risk of default. With a lower default risk, lenders are willing to offer better terms and demand a lower default risk premium. (49) Also, with the sanctions in place, more lenders will be willing to lend, thereby increasing the flow of capital to those countries that need to borrow.

Based on the most straightforward analysis, a world in which a sovereign bore no cost by defaulting would be one in which sovereigns might default with impunity and would be free to do so frequently. Potential lenders would perceive this situation and would refuse to lend. Therefore, it is imperative that there be substantial costs of default if there is to be any sovereign lending at all. As the critics of vulture funds certainly agree, the presence of vulture investors raises the cost of default. To have this beneficial effect, vultures do not always actually have to invest in the troubled bonds. A sovereign debtor knows that if it behaves in a grossly unfair manner, vultures will appear to challenge the defaulter's behavior, thereby raising the cost of that default. In short, vultures raise the cost of default, thereby providing at least some restraint on opportunistic default, and helping markets avoid defaults that are driven by an unwillingness to pay rather than a strict inability to pay. The sovereign borrower that knows it may face an attack by vultures in the event of default will also tend to avoid over-borrowing, so sovereigns will be more likely to borrow only what they need and can reasonably expect to repay. This too helps the market function more smoothly with nations borrowing and repaying on a regular basis.

The existence of vulture investors emphasizes that the holders of sovereign bonds are diverse and that they will have different interests and motivations. For example, consider two classes of creditors for a sovereign, a large international bank and a single individual pension investor. The bank is likely to have a variety of business relationships with the sovereign and within the borrower's country, while the individual investor likely has no other business relationship with the borrowing country. The variety of other relationships that the bank has with the debtor country changes the motivation for aggressive demands for repayment in a sovereign default. The bank might reasonably believe that taking a loss on the bonds can be offset by maintaining those other business relationships--what it loses on the bonds, it can make up through other avenues. By contrast, the individual investor has no such avenue by which she can offset her losses on the defaulting bonds.

There is also an ironic element in the standing of the large and small investor just described. The bank accedes to the restructuring as it pursues its own interest, knowing that it can make up its bond losses through its other commercial ventures in the defaulting nation, but the individual holds out in the hopes of securing better treatment eventually. Meanwhile, the holdout is vilified for refusing to accept the losses the debtor offers, while the bank receives moral praise for participating in the restructuring as it merely follows its own interests. Acquaintance with some of these holdouts, sometimes called "little vultures," heightens the irony. For example, Norma Lavorato saved for 43 years and invested $45,000 in Argentine government bonds that defaulted in 2001. Now 85, she is still waiting for some repayment. In the interim, she has had to endure the title of being a "little vulture," and a government news outlet has tried to shame her by naming her as being an Argentine who is on the side of the vultures. (50) With this Argentine default being the largest sovereign default in history at the time, there are thousands of similarly situated individuals in Argentina and abroad.

Unlike the unlucky and powerless individual, such as Ms. Lavorato, a vulture investor can effectively represent a collection of individuals, because the vulture investor accumulates bonds and attains an economic standing that is sufficient to pursue costly litigation and successfully demand the attention of the debtor nation. A single individual investor can have no such standing and therefore is much more vulnerable to the whims of the debtor and the interests of larger and more powerful creditors.

Defaulting sovereigns sometimes seek to discriminate among bondholders in granting repayment. Vulture funds can help to redress unfair repayment discrimination. Sovereigns who float international bonds typically have a mix of domestic and foreign creditors. Consider a borrower who chooses to default, but offers very generous restructuring terms to domestic creditors and terrible terms to a minority of foreign bondholders. The well-treated domestic creditors might willingly accept the restructuring agreement, leaving the foreign bondholders to suffer massive losses. The existence of vulture funds provides at least some avenue of redress for those victimized foreign bondholders. In short, different groups of bondholders have different interests and can suffer differently in restructuring agreements. Similarly, the creditor government can offer more generous restructuring terms to some bondholders over others. The vulture offers one avenue of some redress to the disenfranchised class of bondholders. The existence of this potential form of redress will, therefore, make investors from those groups more likely to lend if they believe they have some avenue to seek reasonable treatment in the event the sovereign defaults.

Finally, consider a sovereign that is truly incapable of paying fully as promised. Such a debtor will have some capacity to pay, so the circumstances imply that there will be a restructuring and bondholders will have to suffer a haircut. The sovereign might be tempted to reason as follows: Given that a default is unavoidable, we might as well default completely and impose a severe haircut. Alternatively, the defaulting sovereign might reason that it cannot pay 100 percent, but that it is able to pay a substantial portion of the debt, say 75 percent.

Vultures have little incentive to chase a sovereign that is truly incapable of paying, and this is reflected in the actually infrequent number of suits documented in the previous section. However, if the restructuring imposes a much more severe haircut than necessary, the abuse of the bondholders is more severe and the residual capacity of the sovereign to pay is larger. Not surprisingly, vulture investors are attracted to those situations in which the abuse is greatest and the sovereign's remaining capacity to pay is highest. Therefore, by their very presence, vultures help to reduce the occurrence of opportunistic default and to increase the probability that the haircuts that defaults impose are reasonable and consistent with the sovereign's residual ability to pay some of what it has promised. (51)

VI. Conclusion

This article has explained the basic operation of vulture funds and the legal and contractual relationships that govern their conduct and that of the sovereign debt market. We have seen that critics of vulture funds charge them with greed, offending against distributive justice, unfairness to other investors, interfering with orderly restructurings, hurting the economy of the debtor nation, diminishing the market where the bonds are issued, and harming the economy of the nation where the market is located. In a rebuttal of these charges, this article has argued that each of these criticisms is unwarranted.

This article has also made the affirmative case for vulture funds, showing that vultures actually contribute to the welfare of others, to sovereign debt markets, and to the societies of both debtor and creditor nations. First, by buying defaulted bonds, vulture investors provide liquidity to other bondholders. By buying bonds, it increases the overall demand for bonds and raises the price that other bondholders can receive for their defaulted bonds. The purchase of defaulted bonds by the vulture also consolidates claims, and this reduces the negotiating costs for the eventual resolution of the bondholders' claims against the defaulter. The vulture's efforts to secure compensation for its bonds spins off collateral benefits to other holdouts, because they are likely to obtain the same terms for their claims as does the successful vulture investor.

Vulture investors constitute an important deterrent to capricious defaults. Doing so contributes to the soundness of the market, for without costly defaults, sovereigns would have no incentive to repay, potential creditors would have no reason to expect repayment and so would not lend, and the sovereign debt market would cease to exist altogether. Potential action by vultures also provides benefits, even when the vulture never actually takes a position or files a suit. If the sovereign knows that vultures wait in the wings, it will offer restructuring terms that are more commensurate with its capacity to repay. This helps other bond investors realize the true value of their holdings, makes the restructuring proceed more smoothly, and keeps the market operating in a fairer and more reasonable manner. Further, the likely activity of vulture investors helps reduce the sovereign's incentive to discriminate against different classes of bondholders in the restructuring. Further, vultures are not in fact the wildly rapacious, litigation-happy exploiters that their critics allege. As the historical record shows, the actual number of suits is fairly modest and they tend to occur when haircuts are extremely large and the behavior of sovereign defaulters is exceedingly aggressive.

In the belief that vulture investors have been unduly pilloried and that the benefits that they provide to sovereign debt markets has been poorly recognized, this article has embraced the pejorative term of "vulture investor." Opponents of vulture funds have used this pejorative, in part, to substitute for substantive arguments. But accepting the analogy, consider the actual bird--a literal feeder on carrion. In the United States, the turkey vulture, the most common kind, has been protected since 1918 under federal law by the Migratory Bird Treaty Act. Other nations have similar laws, as do many states in the United States. There is even a Turkey Vulture Society which describes itself as "... a non-profit scientific project.... hoping to help promote scientific studies of the life habits and needs of the Turkey Vulture, to protect the vulture and its habitat, and to inform the public of the valuable and essential services this bird provides to mankind and to the environment." (52) Like its eponym, the vulture fund provides valuable services to the sovereign debt ecosystem, and its role should be understood and appreciated, not vilified.

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Robert W. Kolb *

Loyola University Chicago

* Address for correspondence: bobkolb@me.com. Robert W. Kolb, a Professor of Finance, holds the Frank W. Considine Chair of Applied Ethics at the Quinlan School of Business at Loyola University, Chicago.

(1) For accounts of the role of bank lending and debt issuance and the market transitions involved, see: Federal Deposit Insurance Corporation, "The LDC Debt Crisis," Chapter 5 of An Examination of the Banking Crises of the 1980s and Early 1990s, 191-210; Harry Huizinga, "The Commercial Bank Claims on Developing Countries: How Have Banks Been Affected?" in Ishrat Husain and Ishac Diwan, (Eds.), Dealing with the Debt Crisis, Washington, DC: World Bank, 1989, 129-143; Daniel Marx, Jose Echague, and Guido Sandleris, "Sovereign Debt and the Debt Crisis in Emerging Countries: The Experience of the 1990s," in Chris Jochnick and Fraser A. Preston, (Eds.), Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis, Oxford: Oxford University Press, 2006, 55-79; and Daniel McGovern, "Different Market Windows on Sovereign Debt: Private-Sector Credits from the 1980s to the Present," in Vinod K. Aggarwal and Brigitte Granville, (Eds.), Sovereign Debt: Origins, Crises and Restructuring, London: Royal Institute of International Affairs, 2003, 69-91.

(2) For key perspectives on the issue of debt repayment and gunboat diplomacy, see: Laura Alfaro, Noel Maurer, and Faisal Ahmed, "Gunboats and Vultures: Market Reaction to the "Enforcement" of Sovereign Debt," April 2010, working paper. Available at: http://www.econ.ucla.edu/workshops/papers/History/Maurer,%20Gunboats%20and%20Vultures,%20version%205.2.pdf.; Kris James Mitchener, and Marc D. Weidenmier, "Supersanctions and Sovereign Debt Repayment," Journal of International Money and Finance, 2010, 29, 19-36; and Michael Tomz Reputation and International Cooperation: Sovereign Debt Across Three Centuries, Princeton: Princeton University Press, 2007.

(3) Jonathan I. Blackman, and Rahul Mukhi, "The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna," Law and Contemporary Problems, Fall 2010,73, 47-61. See p. 48.

(4) For a fuller discussion of the European Convention, see Reed, Robert K. Reed, "A Comparative Analysis of the British State Immunity Act of 1978," Boston College International and Comparative Law Review, 1979, 3:1, Article 8, 175-222.

(5) Robert K. Reed, "A Comparative Analysis of the British State Immunity Act of 1978," Boston College International and Comparative Law Review, 1979, 3:1, Article 8, 175-222.

(6) Jonathan I. Blackman, and Rahul Mukhi, "The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna," Law and Contemporary Problems, Fall 2010,73, 47-61. See p. 54. For further discussions of champerty, see: Laura Alfaro, Noel Maurer, and Faisal Ahmed, "Gunboats and Vultures: Market Reaction to the "Enforcement" of Sovereign Debt," April 2010, working paper. Available at: http://www.econ.ucla.edu/workshops/papers/History/Maurer,%20Gunboats%20and%20Vultures,%20version%205.2.pdf; Jill E. Fisch, and Caroline M. Gentile, "Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring," Emory Law Journal, 2004, 53, 1043-1113; Ugo Panizza, Federico Sturzenegger, and Jeromin Zettelmeyer, "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, 2009, 47:3, 651-598; and Julian Schumacher, Christoph Trebesch, and Henrik Enderlein, "Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010," May 2014, working paper. Available at: https://ijsbergmagazine.com/wp-content/uploads/2014/12/SSRNid2189997.pdf.

(7) Cited in Jonathan I. Blackman, and Rahul Mukhi, "The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna," Law and Contemporary Problems, Fall 2010,73, 47-61. See p. 55.

(8) In 2013, a U.S. Court of Appeals issued a ruling against Argentina that turned on a somewhat expansive and controversial interpretation of the pari passu clause, and this ruling was upheld by the U.S. Supreme Court in July 2014. See: NML Capital, Ltd. v. Republic of Argentina, UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, Decided: August 23, 2013.

(9) For the pros and cons of a sovereign debt restructuring mechanism, see: Patrick Bolton, "Toward a Statutory Approach to Sovereign Debt Restructuring: Lessons from Corporate Bankruptcy Practice Around the World," IMF Staff Papers, Volume 50, Special Issue, 41-71; Kunibert Raffer, "The IMF's SDRM--Simply Disastrous Rescheduling Management?" in Chris Jochnick and Fraser A. Preston, (eds.), Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis, Oxford: Oxford University Press, 2006, 246-266; Kenneth Rogoff and Jeromin Zettelmeyer, "Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001," IMF Staff Papers, 2002, 49:3; Nouriel Roubini, "Do We Need a New Bankruptcy Regime?" Brookings Papers on Economic Activity, 2002, 1, 321-333; Anna J. Schwartz, Anna J., "Do Sovereign Debtors Need a Bankruptcy Law?" Cato Journal, Spring 2003, 23:1, 87-100; and Michelle J. White, "Sovereigns in Distress: Do They Need Bankruptcy?" Brookings Papers on Economic Activity, 2002, 1, 287-319.

(10) For example, all new sovereign debt issues in the Eurozone have been required to have CACs since 2013. See Michael Bradley and Mitu Gulati, "Collective Action Clauses for the Eurozone: An Empirical Analysis," Review of Finance, October 2014, 18:6, p. 2045. A number of commentators have analyzed the benefits and costs of CACs from both the point of view of the debtor and creditor. One of the lively concerns has been the willingness of potential creditors to accept a diminution of their rights. Correlatively, some economists fear that the introduction of CACs will make borrowing more expensive for sovereign debtors. See: William W. Bratton and G. Mitu Gulati, "Sovereign Debt Reform and the Best Interest of Creditors," Vanderbilt Law Review, January 2004, 57:1, 1-79; Stephen J. Choi and G. Mitu Gulati, "Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds," Emory Law Journal, 2004, 53, 929996; Anna Gelpern and Mitu Gulati, "Innovation after the Revolution: Foreign Sovereign Bond Contracts Since 2003," Capital Markets Law Journal, January 2009, 4:1, 85-103; Jason B. Gott, "Addressing the Debt Crisis in the European Union: The Validity of Mandatory Collective Action Clauses and Extended Maturities," Chicago Journal of International Law, Summer 2011, 12:1, 201-228.; Mark Gugiatti and Anthony Richards, "The Use of Collective Action Clauses in New York Law Bonds of Sovereign Borrowers," Georgetown Journal of International Law, 2003-204, 815-835; Sonke Haseler, "Collective Action Clauses in International Sovereign Bond Contracts--Whence the Opposition," Journal of Economic Surveys, 23:5, 2009, 882-923; J. F. Hornbeck, "Argentina's Defaulted Sovereign Debt: Dealing with the 'Holdouts'," February 2013, Congressional Research Service, working paper. Available at: https://www.fas.org/sgp/crs/row/R41029.pdf; Elmar B. Koch, "Collective Action Clauses: The Way Forward," Georgetown Journal of International Law, Summer 2004, 35:4, 665-692; and Anthony Richards and Mark Gugiatti, "Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets," International Finance, 2003, 6:3, 415-447.

(11) William W. Bratton and G. Mitu Gulati, "Sovereign Debt Reform and the Best Interest of Creditors," Vanderbilt Law Review, January 2004, 57:1, 1-79.See p. 23.

(12) See Lee C. Buchheit, "How Ecuador Escaped the Brady Bond Trap," International Financial Law Review, December 2000, 17-20; Stephen J. Choi and G. Mitu Gulati, "Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds," Emory Law Journal, 2004, 53, 929-996; Katherina Fernandez and Roque B. Fernandez, "Willingness to Pay and the Sovereign Debt Contract," Journal of Applied Economics, May 2007, 10:1, 43-76; Jill E. Fisch and Caroline M. Gentile, "Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring," Emory Law Journal, 2004, 53, 1043-1113; Sonke Haseler, "Collective Action Clauses in International Sovereign Bond Contracts--Whence the Opposition," Journal of Economic Surveys, 23:5, 2009, 882-923; and Arturo C. Porzecanski, "From Rogue Creditors to Rogue Debtors: Implications of Argentina's Default," Chicago Journal of International Law, Summer 2005, 6:1, 311-332.

(13) Sonke Haseler, "Collective Action Clauses in International Sovereign Bond Contracts--Whence the Opposition," Journal of Economic Surveys, 23:5, 2009, 882-923.

(14) Stephen J. Choi, and G. Mitu Gulati, "Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds," Emory Law Journal, 2004, 53, 929-996.

(15) Joseph E. Stiglitz, "The Vultures' Victory," Project Syndicate, September 4, 2013.

(16) Jonathan Goren, "State-to-State Debts: Sovereign Immunity and the 'Vulture' Hunt," George Washington International Law Review, 2010, 41, 681-708. See pp. 682-683.

(17) Hearing Before the Subcommittee on Africa and Global Health of the Committee on Foreign Affairs, House of Representatives, "Vulture Funds and the Threat to Debt Relief in Africa: A Call to Action at the G-8 and Beyond," May 22, 2007.

(18) Greg Palast, "Vulture Fund Threat to Third World," gregpalast.com, February 14, 2007.

(19) Ashley Seager and James Lewis, "How Top London Law Firms Help Vulture Funds Devour Their Prey," The Guardian, October 16, 2007.

(20) World Bank, "World Bank to Increase Support to Curb Vulture Fund Actions," May 31, 2007, press release. While the litigants may have been awarded $1 billion in judgments, that in no way implies that they succeeded in collecting the full award.

(21) Ashley Seager and James Lewis, "How Top London Law Firms Help Vulture Funds Devour Their Prey," The Guardian, October 16, 2007.

(22) Joseph E. Stiglitz, "The Vultures' Victory," Project Syndicate, September 4, 2013.

(23) The Paris Club is an informal collection of rich-nation governments who are creditors of sovereign governments, mostly from relatively impoverished countries. Since 1956, the Club has met monthly in Paris to confer with debtor nations and to seek agreement with them on restructuring their debts. Member governments are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, the Russian Federation, Spain, Sweden, Switzerland, the United Kingdom and the United States of America. See Paris Club, "Press Release of the Paris Club on the Threats Posed by Some Litigating Creditors to Heavily Indebted Poor Countries," May 22, 2007.

(24) Paris Club, "Press Release of the Paris Club on the Threats Posed by Some Litigating Creditors to Heavily Indebted Poor Countries," May 22, 2007.

(25) Paris Club, "Press Release of the Paris Club on the Threats Posed by Some Litigating Creditors to Heavily Indebted Poor Countries," May 22, 2007.

(26) Tim R. Samples, "Rogue Trends in Sovereign Debt: Argentina, Vulture Funds, and Pari Passu Under New York Law," 35 Nw. J. Int'lL. & Bus. 49 (2014). Available at: http://scholarlycommons.law.northwestern.edu/njilb/vol35/iss1/2.

(27) Nouriel Roubini, "Do We Need a New Bankruptcy Regime?" Brookings Papers on Economic Activity, 2002, 1, 321-333.

(28) See, for instance, Brent Kendall, "Supreme Court Sides With Holdout Creditors in Argentina Debt Case," Wall Street Journal, June 16, 2014.

(29) Joseph E. Stiglitz, "The Vultures' Victory," Project Syndicate, September 4, 2013.

(30) See: Jonathan I. Blackman and Rahul Mukhi, "The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna," Law and Contemporary Problems, Fall 2010,73, 47-61, (see p. 60); and Jonathan Goren, "State-to-State Debts: Sovereign Immunity and the 'Vulture' Hunt," George Washington International Law Review, 2010, 41, 681-708. See p. 690, 691, and 703.

(31) Interview for the Public Broadcasting System program, The Commanding Heights, July 2, 2001. Available at: http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_mahathirbinmohamad.html.

(32) See Richard Peet, Unholy Trinity: The IMF, the World Bank and WTO, 2e, Zed Books, 2012.

(33) Jeffrey Sachs and John Williamson, "Managing the LDC Debt Crisis," Brookings Paper on Economic Activity, 1986, No. 2, 397-440. See pp. 397-398.

(34) J. E. Stiglitz, "Ethics, Market and Government Failure, and Globalization: Perspectives on Debt and Finance," in Chris Jochnick and Fraser A. Preston, (Eds.), Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis, Oxford: Oxford University Press, 2006, 158-173. See p. 162, 165.

(35) For other analyses of the function of international financial institutions as well as some criticisms of their self-serving nature and hegemonic role, see: Rosa M. Lastra, "The Role of the International Monetary Fund," chapter 5 of Rosa Lastra and Lee Buchheit, (Eds.), Sovereign Debt Management, Oxford: Oxford University Press, 2014; Louis A Perez, Jr., and Deborah M. Weissman, "Public Power and Private Purpose: Odious Debt and the Political Economy of Hegemony," 32 N.C. J. Int'l L. & Com. Reg., June 2007; Lucio Simpson, "The Role of the IMF in Debt Restructurings: Lending Into Arrears, Moral Hazard and Sustainability Concerns," May 2006, working paper; Robert J. Barro, Robert J., and Jong-Wha Lee, "IMF Programs: Who Is Chosen and What Are the Effects?" Journal of Monetary Economics, 2005, 52, 1245-1269; Paul Blustein, The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF, Public Affairs, 2003; Mark S. Copelovitch, "Master or Servant? Agency Slack and the Politics of IMF Lending," November 2006, working paper; Richard Peet, Unholy Trinity: The IMF, the World Bank and WTO, 2e, Zed Books, 2012; and Jeffrey D. Sachs, "The IMF is Bleeding Argentina to Death," Project Syndicate, April 24, 2002.

(36) International Monetary Fund, "A Survey of Experiences with Emerging Market Sovereign Debt Restructurings," June 5, 2012. See p. 12.

(37) Julian Schumacher Christoph Trebesch, and Henrik Enderlein, "Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010," April 2013, working paper.

(38) International Monetary Fund, "A Survey of Experiences with Emerging Market Sovereign Debt Restructurings," June 5, 2012. See its Executive Summary.

(39) International Monetary Fund, "Sovereign Debt Restructuring: Recent Developments and Implications for the Fund's Legal and Policy Framework, April 26, 2013. See p. 1.

(40) See: Arturo C. Porzecanski, "From Rogue Creditors to Rogue Debtors: Implications of Argentina's Default," Chicago Journal of International Law, Summer 2005, 6:1, 311-332; Tim R. Samples, "Rogue Trends in Sovereign Debt: Argentina, Vulture Funds, and Pari Passu Under New York Law," 2014, working paper; and Hal S. Scott, "Sovereign Debt Default: Cry for the United States, Not Argentina," September 2006, working paper.

(41) NML Capital, Ltd. v. Republic of Argentina, UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, Decided: August 23, 2013. See p. 23.

(42) NML Capital, Ltd. v. Republic of Argentina, UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, Decided: August 23, 2013. See p. 12.

(43) NML Capital, Ltd. v. Republic of Argentina, UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, Decided: August 23, 2013. See pp. 24-25.

(44) Regarding the liquidity-enhancing benefits of vulture investors see: Katherina Fernandez and Roque B. Fernandez, "Willingness to Pay and the Sovereign Debt Contract," Journal of Applied Economics, May 2007, 10:1, 43-76, (see p. 46); Jill E. Fisch and Caroline M. Gentile, "Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring," Emory Law Journal, 2004, 53, 1043-1113, (see p. 1047); Paul M. Goldschmid, "More Phoenix Than Vulture: The Case for Distressed Investor Presence in the Bankruptcy Reorganization Process," Columbia Business Law Review, 2005, 191-274, (see p. 193); Jonathan Goren, "State-to-State Debts: Sovereign Immunity and the 'Vulture' Hunt," George Washington International Law Review, 2010, 41, 681-708, (see p. 693); and Felix Salmon, "In Defense of Vulture Funds," February 24, 2007, http://www.felixsalmon.com/2007/02/in-defense-of-vulture-funds/.

(45) For the most extended and affirmative defense of reputation as a key motivator for debt repayment, see Michael Tomz, Reputation and International Cooperation: Sovereign Debt Across Three Centuries, Princeton: Princeton University Press, 2007. For an introductory treatment of the issues surrounding the theory of sovereign debt, see Robert W. Kolb, "Sovereign Debt: Theory, Default, and Sanctions," in Robert W. Kolb (Ed.), Sovereign Debt: From Safety to Default, Hoboken, NJ: John Wiley & Sons, Inc., 2011, pp. 3-13. Mark L. J. Wright, "The Theory of Sovereign Debt and Default," April 2011, working paper, provides an excellent non-technical summary of current thinking on the theory of sovereign debt and default.

(46) Jeremy Bulow and Kenneth Rogoff, "Sovereign Debt: Is to Forgive to Forget?" American Economic Review, March 1989, 79:1, pp. 43-50. This article provides the classic attack on reputational explanations of sovereign debt. This article has been much criticized and elaborated over the years, but it stands as a key touchstone in the debate.

(47) Kris James Mitchener and Marc D. Weidenmier, "Supersanctions and Sovereign Debt Repayment," Journal of International Money and Finance, 2010, 29, 19-36. This article maintains that supersanctions (a prime example of which would be "gunboat diplomacy") are important in understanding sovereign debt default. By contrast, Michael Tomz, Reputation and International Cooperation: Sovereign Debt Across Three Centuries, Princeton: Princeton University Press, 2007 asserts that supersanctions have marginal importance at best.

(48) See: Douglass C. North and Barry R. Weingast, "Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England," Journal of Economic History, December 1989, 49:4, 803-832; David Stasavage, Public Debt and the Birth of the Democratic State, Cambridge: Cambridge University Press, 2003; Kenneth A. Schultz and Barry R. Weingast, "The Democratic Advantage: Institutional Foundations of Financial Power in International Competition," International Organization, Winter 2003, 57, 3-42; John A. C. Conybeare, "On the Repudiation of Sovereign Debt: Sources of Stability and Risk," Columbia Journal of World Business, Spring/Summer 1990, 4652; Glen Biglaiser, Glen, and Joseph L. Staats, "Finding the "Democratic Advantage" in Sovereign Bond Ratings: The Importance of Strong Courts, Property Rights Protection, and the Rule of Law," International Organization, July 2012, 66:3, 515-535; and Caroline Van Rijckeghem and Beatrice Weder, "Political Institutions and Debt Crises," Public Choice, March 2009, 138:3/4, 387-408.

(49) Glen Biglaiser, and Joseph L. Staats, "Finding the "Democratic Advantage" in Sovereign Bond Ratings: The Importance of Strong Courts, Property Rights Protection, and the Rule of Law," International Organization, July 2012, 66:3, 515-535.

(50) Sara Schaefer Munoz, "New York Talks Lift Hopes of Small Argentine Bondholders," Wall Street Journal, July 6, 2014.

(51) William W. Bratton and G. Mitu Gulati, "Sovereign Debt Reform and the Best Interest of Creditors," Vanderbilt Law Review, January 2004, 57:1, 1-79. See also, Jill E. Fisch and Caroline M. Gentile, "Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring," Emory Law Journal, 2004, 53, 1043-1113.

(52) http://turkeyvulturesociety.wordpress.com/the-turkey-vulture-society/
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