Vulture Funds

Currently, according to International Monetary Fund (IMF), global debt reaches the amount of USD 184 trillion in nominal terms, considering sovereign and private debtors. As is widely known, most indebted countries are developed nations. Nevertheless, a big percentage of the current world debt is on emerging market economies or even worst, in low income developing countries.

Some of them have faced default situations in the past, accompanied by social, economic and political crisis. When a sovereign debt default occurs, a preponderant role is usually played by highly speculative investment funds, also commonly known as vulture funds.

Several legal tools have been applied throughout history to mitigate damaging effects of debt negotiation with highly speculative creditors. Proposals always face a key point in between avoiding or reducing the moral hazard on the part of debtor States and not rewarding creditor bad faith behavior while harming general interest.

In the last twenty years, collective action clauses (CACs) included by States into prospectus when issuing sovereign bonds, have been playing a key role in offering countries a tool to deal with creditors in debt restructuration process when default situations occur or are expected to occur, allowing countries to reach debt restructuration agreements with bond holders without requiring unanimous consent.

However, is estimated that USD 300 billion in sovereign bonds are circulating in financial markets without including CACs in its prospectus. That fact offers the essential tool to vulture funds to block agreements when restructuration processes are expected to occur. A legislative path has been initiated by Belgium and France when it comes to propose actions against vulture funds.

This book will analyze some weakness aspects regarding legislative initiatives and will propose creation of vulture funds registries.