Kupelian & Sol Rivas: Vulture Funds – The Lawsuit Against Argentina and the Challenge They Pose to the World Economy

From the Introduction:

After the sharp downturn of the Argentine economy in 2001 that culminated in the default on its external debt in December of that year, the Government, as part of the economic recovery process, offered in 2005 a swap of its defaulted debt with the aim of normalizing its situation. The restructuring process was successful, on the one hand, because of the haircut on the principal amount of its debt and the extension of terms that were agreed upon and, on the other, due to the level of acceptance obtained, which subsequently increased, in 2010, when the exchange was reopened, leading to the participation of over 91% of the total number of eligible creditors. The remaining 9% that chose not to enter into the negotiation is represented by bonds held by private investors, holdouts and vulture funds that waited out the restructuring process only to reject it and bring legal actions demanding full payment of those bonds. That is precisely how vulture funds operate, as they are high-risk investment funds that deliberately purchase debt securities from economies that are weak or on the verge of collapse, at very low prices, and later demand in court the full value of those bonds plus any accrued interest. A distinction should be drawn between those funds and holdouts, which are merely creditors who, for different reasons, do not accept the restructurings but do not speculate about bringing legal actions.

A part of those legal actions is currently being dealt with by Argentina and, in this case, they represent 0.45% of the debt defaulted on in 2001. This dispute is on everyone’s lips, since the decisions to be made by the US courts will have significant implications at a global level.

 

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