Vultures don’t kill: Argentina’s Battle With Holdout Funds Displays Shortcomings in The Architecture of International Finance


By Alexander Ohm*


Protest outside Elliott Capital Management offices in New York. Photo: Jubilee Debt Campaign. Obtained from

On June 23, the Argentine government published page-long advertisements in major newspapers around the world like the Washington Post, warning concerned readers about the so-called “vulture funds” threatening the country’s public finances.[1] Although President Cristina Fernández de Kirchner has every reason to be concerned about Argentina’s financial stability, her blaming of the vultures, mainly two hedge funds holding between one and two per cent of the country’s public debt, falls short of stating the broader problem: the absence of a globally-respected mechanism for the orderly resolution of unsustainable public debt to fall back on.

Argentine Sovereign Debt Problems

A recent ruling in the U.S. put an issue back on the top of Argentina’s agenda that has remained in legal limbo for the last decade. In December 2001 and after a prolonged economic crisis, Argentina finally defaulted on its public debt of $132bn. Argentina reached agreements with the large majority of its foreign creditors for debt restructurings in 2005 and 2010. These restructurings resulted in a large cut for the creditors yet also reassured them of Argentina’s ability and willingness to live of up to the remaining obligations, including a premium if economic growth kicked in. Thanks to the strong demand for resources until the global economy slowed down in recent years, the haircut for the investors, eased by the ‘growth premium’, happened to be less severe than originally expected.

However, a minority of about 7 percent of the total debt in 2002 did neither agree to the restructuring in 2005 nor in 2010 but decided to hold on to the original bonds. In addition, some hedge funds, dubbed “vulture funds” for their propensity to buy sovereign debt of countries in financial distress speculating on future paybacks, bought defaulted Argentine bonds for cents on the dollar. These funds, representing about 1 percent of the sovereign debt on which Argentina defaulted in 2001, engaged in an ongoing legal battle against the Argentine government that refuses to pay the holders of the original bonds. While it honored its obligations to the restructured debt, the Argentine government has refused to reopen the exchanges of 2005 and 2010 for the investors holding to the old bonds and to pay the original bonds. This triggered a long litigation under U.S. judiciary where the bonds were originally issued. In the end of June, finally, the supreme court reaffirmed a former ruling and refused Argentina’s plea against the judgement. Accordingly, Argentina is not allowed to distinguish between different creditors and has to pay the the holders of old bonds first. Banks have to cooperate with the debtors to locate Argentine assets which can be seized. In addition, the ruling refuses the disbursement of funds to the holders of restructured bonds which were due in the end of June. Thus, after a 30-day grace period, Argentina could technically default on its foreign debt on July 30.[2]

Did the Ruling Checkmate Argentina?

While it seems like the ruling of the supreme court has started the end game between Argentina and the holdouts, the government’s scope of action is largely determined by former decisions. Those decisions are linked to the lack of a global mechanism for the orderly restructuring of unsustainable public debt. First, former governments preferred to issuance of public debt in New York rather than under Argentine jurisdiction. Secondly, they decided against the inclusion of collective action clauses that curb the power of holdouts if enough bondholders can be persuaded to a restructuring.[3] Thirdly, they included a “RUFO”, or Rights Upon Future Offerings clause meaning that any voluntary agreement with the holdouts could create a premise for the repayment of outstanding debt those holders who agreed to forgo it in the first place by accepting the term of the restructurings in 2005 or 2010.[4]

The resulting predicament for President Kircher is easy to state: paying the holdouts the outstanding debt and interest of about $1.5bn could lead claims by the other 7 percent clinging to old bonds, or another $15bn. In a worst case scenario even the creditors who settled with Argentina in the debt-swaps could revive their claims which would, according to estimates by the government, lead to another $120bn of outstanding liabilities, or outright insolvency. Yet, if Kirchner refuses to settle with the plaintiffs of the New York case until the end of the July, the next payments on the restructured bonds will be missed as the ruling forbids the Argentine trustee, a New York bank, to transact the necessary funds to bondholders. Thus, a compromise between Argentina and the holdouts involving a trick that rules out further claims appears to be the only viable solution for both sides, while it remains open if such a deal will be reached before the deadline expires and how its details will look like.

Sovereign Debt Restructuring Mechanism

The repercussions of the legal battle for the future of sovereign debt restructurings, however, could reach far beyond Argentina’s looming bankruptcy. In an essay on the “Global and systemic implications of United States Supreme Court rulings in favour of hedge funds over Argentina on 2001 defaulted bonds”, UNCTAD argues that the U.S. ruling caused a general shift of in favor of creditors and to the detriment of sovereigns. It undermines financial incentives for the participation in debt restructurings and thus will make them more difficult in future. Furthermore, it drags providers of financial services into the legal battle between debtors and creditors by stating that they have to provide confidential information to creditors in order to help them to recuperate their outstanding claims. Therefore, UNCTAD revives the idea of a common mechanism to the restructuring of sovereign debt, an idea that has already been outlined by then chief economist of the IMF Anne O. Krueger in 2002.[5]

The IMF itself has recently published a paper discussing ways to upgrade the lending framework of their exceptional access facility for countries in financial distress. While the IMF acknowledges the problems caused by creditors who do not accept a restructuring of sovereign debt, the fund takes “… it as given that any … restructuring of debt would take place through market-based mechanisms.” Therefore, collective action problems like those faced by the Argentine government should be solved by contractual amendments rather than by introducing a mechanism common to all sovereign debt restructurings.[6]

The original IMF proposal took a less rigid approach. It stated that “if the debtor and creditors were able to agree a restructuring between themselves, they would of course be free to do so without having to invoke the mechanism.” Yet, the idea behind introducing an optional mechanism was to introduce a least common denominator for both creditors and debtors to agree to. “Indeed, the intention is that the existence of a predictable legal mechanism will in itself help debtors and creditors to reach agreement without the need for formal activation.”[7]

Time for a Second Try

Back in 2002, the proposal did not gain traction in international politics and never made it beyond a draft. After all, with the crises in most emerging markets resolved by the early 2000s, markets rallied upwards until the U.S. subprime mortgage market collapsed in concert with Lehman Brothers in 2007. Today and nearly 7 years into the resulting global financial turbulences we live in another world; one that might be more welcoming to the development of a common framework for the resolution of unsustainable public debt.

The political battles around the U.S. debt ceiling and the partial government shutdown in 2013 and most impressively the sovereign debt crisis of the Euro zone have made it clear that unsustainable public debt has not to be confined to emerging economies or Latin America.

Mexico, France, Germany, and the USA have stated their support to Argentina as they see a retrenchment of sovereignty in the rulings. In addition, the Group Of The 77 and China declared to stand behind Argentina.[8] This widespread support by other sovereigns reflects the possible implications of the rulings. It also shows that sovereign debt, once again, is recognized as part of foreign relations rather than just another class of financial instruments.

Lastly, the power within the international architecture shifted in favor of former debtors and new creditors, away from those countries with a high stake in IMF and World Bank as principal institutions for the resolution of balance of payment and sovereign debt problems. For instance China’s ongoing rally for reforms in institutions of international finance make clear that support will come at the price of changes to the status quo, maybe a sovereign debt restructuring mechanism could become one of them.

Further information:–yeyati

[1] “Ad from the Government of Argentina published in US …” 2014. 14 Jul. 2014 <>

[2] For a good overview, also see:

[3] In fact, after the issuance of the original debt, a more encompassing form of the collective action clause was introduced in many new bonds, and has to be included in bonds by Euro members – a learning from the European sovereign debt crisis.

[4] For more about the RUFO clause, see:

[5] “ | Argentina’s ‘vulture fund’ crisis threatens …” 2014. 14 Jul. 2014 <>

[6] “The Fund’s Lending Framework and Sovereign Debt … – IMF.” 2014. 14 Jul. 2014 <>

[7] Krueger, AO. “A New Approach to Sovereign Debt Restructuring, April 2002.” 2002. <>

[8] See: For the declaration by the Group of the 77 and China, see:

*Alexander Ohm holds a BA in Politics and Public Management from Zeppelin University (Germany). During his bachelor he went on exchange for one semester at the University of California, Berkeley. He is currently doing an internship at the Mexican Council on Foreign Relations (COMEXI). Before university he volunteered for a year in the Philippines at a local government unit, and during his studies he interned in Business Development at a start-up incubator and at the German Development Corporation (GIZ) in Berlin in the unit for emerging economies and global partnerships. He is especially interested in international political economy and next September he will begin a Master in International Trade, Finance and Development at the Barcelona Graduate School of Economics.



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