Debeaking the Vultures

In the midst of the ongoing dispute between Argentina and the “vulture funds” that hold its bonds, a broad consensus has emerged concerning the need for sovereign-debt restructuring mechanisms. Otherwise, US court rulings in the vultures' favor will give free rein to those who would sabotage future restructurings.

NEW YORK – In the midst of the ongoing dispute between Argentina and the “vulture funds” that hold its bonds, a broad consensus has emerged concerning the need for sovereign-debt restructuring mechanisms (SDRMs). Otherwise, US Federal Judge Thomas P. Griesa’s ruling that Argentina must pay the vultures in full (after 93% of other bondholders agreed to a restructuring) will give free rein to opportunistic behaviors that sabotage future restructurings.

Most recently, the International Capital Market Association (ICMA) recommended new terms for government bonds. Though the ICMA’s proposal leaves unresolved the hundreds of billions of bonds written under the old terms, the new framework says in effect that Griesa’s interpretation was wrong, and recognizes that leaving it in place would make restructuring impossible.

The ICMA’s proposed contractual terms clarify the pari passu clause that was at the heart of Griesa’s muddle-headed ruling. The intent of the clause – a standard component of sovereign-bond contracts – was always to ensure that the issuing country treated identical bondholders identically. But it has always been recognized that senior creditors – for example, the International Monetary Fund – are treated differently.

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