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).
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