Common sense set to prevail in New York
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Illustration: Natalie Peeples/Axios
For a while there, it looked as though legislators in New York State might be about to upend the world of sovereign debt. Now, a decidedly sensible compromise seems to be the most likely outcome.
Why it matters: Legislators have been talking aggressively about how they want to crack down on vulture funds. A bill introduced last week targets just those funds — while leaving the broader market structure unscathed.
The big picture: There's serious disagreement in the world of sovereign debt about whether vulture funds are even a problem anymore.
- Vultures are funds that buy up debt that's either in default or about to go into default, at much less than face value. They then sue to be repaid in full, with interest.
- Sometimes, such tactics have earned them billions of dollars — money that came directly out of a poor government's budget.
- Today, such tactics are much more difficult. Most sovereign bonds have collective action clauses, which mean that once a supermajority of bondholders has agreed to a restructuring, would-be vultures get forced to participate whether they like it or not.
State of play: Multiple bills seeking to transform the sovereign debt restructuring process have been circulating in Albany, whose power comes from the fact that about half of the market's bonds are governed by New York law.
- Critics of those bills said they would chill lending to emerging economies.
- The latest bill, now most likely to pass, is the narrowest one. It allows investor lawsuits demanding debt repayment to be barred on the grounds of champerty — a doctrine that bars lawsuits from anyone who bought a claim with the express intention of suing.
The background: In 1998, a vulture investor named Elliott Associates was found guilty of champerty in its attempts to get repaid on debt owed by Peru.
- In 2004, thanks in part to lobbying by Elliott, the champerty argument was barred for any claims over $500,000. The new bill effectively rolls back the 2004 law.
What they're saying: "The bill is narrowly focused," explains one of the sponsors, state senator Liz Krueger, whose bill takes care to ensure that only vulture funds are being targeted.
- "Conventional investors," she writes, will continue to be allowed to sue for what they're owed in court.
The bottom line: The way the bill is structured is quite clever. If vulture investors aren't a problem then it will cause no harm; if they pose a threat then it has real teeth.
- While the other bills aren't entirely dead, they probably won't find the support needed to get passed if the champerty bill makes it through.
