Argentina and the Vulture Funds

Role played by legal clauses like the collective action clause and the pari passu in sovereign debt issuances

Anytime a default on payments takes place, what follows is the debtor entering into talks with the creditors to restructure the debt obligation. The collective action clause imposes reorganizational terms to all creditors that are similar. The reorganizational terms must, however, be agreed upon by a specific percentage of lenders from 75% to 90%. The collective action clauses prevent the small number of creditors (25% and below) from blocking the restructuring. The pari passu on the other hand calls for equal treatment for all creditors. The clause, therefore, ensures that there are no preferences to some creditors over the others (pg. 231).

The difference between vulture funds and a typical hedge funds investing in sovereign debt.

The typical hedge fund purchases a substantial amount of the distressed corporation hence becoming an integral part of the saving of the company from plunging into dissolution. However, hedge funds investing in sovereign debt take the model of vulture fund where they have made the buying and selling of the traded distressed debt a form of business. Through this, they are able to make supernormal returns within a very short period. The same time it would take to fall into financial distress. However, firms like Gramercy protect themselves from falling by using credit default swaps (CDSs) (pgs. 232- 234).

Alternatives for resolving the crisis.

The crisis where the country is unable to pay its debts is as a result of the adverse effects of vulture fund activities. Therefore, before any restructuring of the legal debts, the country should make changes which will ensure that there are adequate regulations of the vulture fund activities. The country should have an independent body that assesses debt sustainability in the country and comes up with other strategies for resolving the issue rather than relying on the vulture fund alone (Kanaga).