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.
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39 STAN. J. INT'L L. 253 (2003)

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