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39 Stan. J. Int'l L. 253 (2003)
Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Debt Litigation

handle is hein.journals/stanit39 and id is 263 raw text is: Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Debt Litigation CHRISTOPHER C. WHEELER* AND AMIR ATTARANt I. INTRODUCTION A. Overview The collective action problem posed by holdout creditors who defect from debt restructurings is an inherent feature of finance. The market for sovereign debt presents no exception-holdout creditors have always threatened to jeopardize effective sovereign restructurings. Their refusal to go along with the plan tends to deter participation in the restructuring by other creditors. Historically, sovereign lending has been dominated by a small group of large banks and financial institutions that enforced participation in debt restructurings among themselves, disciplining holdout creditors with a combination of regulatory and financial pressure. In recent years, however, the post-Brady Plan' shift from bank syndicate financing to bond financing2 has created a new financial environment in which weak institutional and informal constraints no longer deter defections. * Associate, Howard, Rice, Nemerovski, Canady, Falk & Rabkin, San Francisco. J.D., Harvard Law School, 2002; B.A., Williams College, 1996. This paper is dedicated to Warren Moskowitz, for whom I had the privilege of working in the Emerging Markets Group at the Federal Reserve Bank of New York. I would also like to thank Jeremy Pam and Lee Buchheit of Cleary, Gottlieb, Steen & Hamilton in New York, who generously shared their knowledge from the frontier of the sovereign debt world. Additional thanks go to my advisor, Professor Hal Scott, and to Professors Mark Roe and Duncan Kennedy, all of Harvard Law School, who were kind enough to review portions of this Article. Finally, this work benefited from the support of Jeffrey Sachs and the Center for International Development at the Kennedy School of Government at Harvard University. t Amir Attaran, a Research Fellow at the Carr Center for Human Rights at the Kennedy School of Government, served as an informal advisor for this Article. I U.S. Secretary of the Treasury Nicholas Brady launched the Brady Plan in March 1989 in response to the Latin American debt crisis. Three principal features of the Brady Plan distinguished it from past restructuring efforts: (1) the conversion of bank loans into freely tradable bonds (securitization); (2) partial collateralization of new bonds with U.S. Treasury bonds of matching maturities; and (3) exit covenants inserted into new bonds which precluded future restructurings. In effect, the creditor banks forgave some of the loans in exchange for the assurance that they would not have to reschedule again. See generally Ross P. Buckley, The Facilitation of the Brady Plan: Emerging Markets Debt Trading from 1989 to 1993, 21 FORDHAM INT'L L.J. 1802 (1999) (analyzing the secondary market in the debt of less developed countries and the promotion and facilitation of the Brady Plan from 1989 to 1993); Lee C. Buchheit, The Evolution of Debt Restructuring Techniques, INT'L. FIN. L. REV., Aug. 1992, at 10. 2 Whereas bonds are liquid instruments that may be held diversely and anonymously, syndicate bank loans are typically issued in concert by a small group of easily identifiable banks. See infra Part ll.B. 253 39 STAN. J. INT'L L. 253 (2003)

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