Vulture Funds, Creditors and Sovereign Debtors: How to Find a Balance?

Abstract

In this paper I attempt to offer a legal analysis of recent legislations adopted in the United Kingdom and Belgium which aim to limit the possibility for sovereign debt creditors to obtain a judgment and collect on what is due to them under sovereign bonds. The paper starts with a review of various instances of holdout creditor litigation, seeking to explain the distinctive features of such litigation. The paper next turns to the various initiatives undertaken in different jurisdictions to curb the activities of so-called 'vulture funds.' The legislation adopted in Belgium and the UK is specifically examined. In a second part, the paper offers a more general analysis of the need for such specific legislation. The need to intervene at national level to restrict the activities of distressed debt funds is questioned, on the basis of recent evolutions both in the sovereign debt market (introduction of collective action clauses) and in the legal framework of such debt (among others the tightening up of the enforcement immunity granted to central bank assets). On this basis, it is submitted that creditor litigation is more a nuisance than an obstacle. In a final section, the paper review the compatibility of the UK Debt Relief Act 2010 with human rights standards, and in particular with Article 1 of the 1st Protocol to the European Convention on Human Rights.

Keywords: Vulture funds, sovereign insolvency, Debt Relief (Developing Countries) Act, Fonds vautours, insolvabilité, dettes souveraines, aasgierfondsen, sovereign debt, sovereign debt crisis

JEL Classification: F34, K12, K33