Abstract

Vulture funds in the sovereign debt market create confusion and uncertainty in the global financial system because of their predatory behavior and litigation tactics. With Argentina failing to make a payment on some of its outstanding sovereign debts on July 30, 2014, for the second time since 2001, it became a serial defaulter and attracted global attention. Though Argentina had been involved in seven defaults from 1827 to 2001, these had been mostly self-inflicted. The 2014 default, on the other hand, seemed to be due to a sudden shift in the international sovereign debt regime in favor of the ‘holdouts’ governed by US laws. Considered the ‘sovereign debt trial of the century’, Argentina continued to fight the legal battle against the vulture funds in the US courts to uphold its sovereign debt restructurings. The key dimension of its sovereign debt default resolution mess was the role played by the vulture funds led by NML Capital founded by a Cayman Islands-based offshore unit of Paul Singer's Elliott Management Corporation. The dispute limited Argentina's access to foreign credit markets because of the blurred sovereign rating. Throughout the last three decades, the IMF’s Sovereign Debt Restructuring Mechanism had been attempting to evolve a framework for sovereign debt default resolution. In the absence of well accepted and adjudicated dispute resolution mechanisms like the bankruptcy laws for companies and individuals, the indebted countries faced a serious risk on many fronts. Argentina faced just such a situation.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Sovereign debt and its market
• Sovereign debt default and the problem of Holdouts in debt restructuring,
• Vulture Funds and their modus operandi in the Argentine debt crisis
• Sovereign debt restructuring mechanisms and the issues and challenges in their management
• Possible way out for Argentina and the lessons learnt

Keywords

International finance, Sovereign debt, Corporate finance, International business law, Sovereign debt default, Sovereign debt restructuring, Holdouts, Vulture funds, Rufo Clause, Argentina, Paris club, Debt Crisis, Financial haircuts, Bond Exchange program, Sovereign ratings