National Anti-Vulture Funds Legislation: Belgium's Turn

Abstract

Sovereign distressed debt investors can create holdout problems during sovereign restructurings. Scholars have suggested a wide-range of normative solutions to alleviate these holdout problems, including ad hoc deals, the creation of a multilateral international sovereign bankruptcy framework, the insertion of collective-action clauses into bonds, the expansion of judicial discretion, and the return of the doctrines of comity and sovereign immunity. However, national legislatures have increasingly begun to exhibit a preference for adopting national legislative solutions to this issue. In 2015, Belgium passed the broadest Anti-Vulture Funds Law to date, which is significant because the law impacts the Euroclear payment system. While this law has received high praise from the United Nations and from other nations also considering passing similar legislation, a careful analysis demonstrates it is not sensitive to the benefits that vulture funds bring, such as providing incentives to sovereigns to form more efficient capital structures, providing a moral hazard counterbalance, serving as liquidity providers on the secondary distressed-debt market, and providing information to the market. If adopted by other nations, Belgium’s law can eliminate the secondary distressed debt market by blocking liquidity-providers from the market. As a result, national legislatures should avoid using Belgium’s law as model law, but rather, enact legislation that enhances active settlement discussions without compromising the bargaining power or rights of either the sovereign or the vulture funds.