History of Vulture Funds
Vulture funds were generally non-existent until the mid-1990s due to how sovereign debt was held. Sovereign debt traditionally had been held by bank syndicates, and these syndicates understood that a rush to collect debt immediately or a holdout by any creditor would serve none of their interests. Furthermore, these banks shared some common interests, such as a desire to secure future business from these debtor countries and a desire to follow the desires of bank regulators. Filing lawsuits to enforce debts would be contrary to those interests, and therefore, the banks stopped litigation by exerting peer pressure on fellow institutions. Creditors, therefore, did not sue to enforce debts. Any holdout creditor or vulture fund would be blacklisted from international banking. Furthermore, many national governments also prevented debt holders from embarking upon a road towards becoming vulture funds. For example, banks progressing down a road towards becoming holdouts might be called by a governmental bank regulator, and be threatened with a financial audit and review.
By the mid 1990s, however, much of the syndicated debts had been converted to freely-traded sovereign bonds. In the early 1980s there was a major debt crisis in Latin America. The crisis begin in 1982, and from 1982 until 1989, there was a long period of restructuring sovereign debt. Many of these debts were held as unsecured syndicated bank loans. It was clear that by 1989, and despite the restructuring plans, the Latin American states were not in any better financial health. In response, U.S. Treasury Secretary Nicholas F. Brady designed the “Brady Plan” in an attempt to address the Latin American debt crisis in March 1989. Under the Brady system, loans were exchanged for sovereign bonds that could be freely traded. By 1998, it was evident that sovereign debt had converted from syndicated bank loans to securitized bonds. Brady bonds have become a generic term for bonds issued during sovereign debt restructuring, but specifically refer to the exchange of commercial bank loans for bond instruments.
With the creation of the sovereign bond market, non-bank investors began to hold substantial amounts of sovereign debt. Such investors with divergent interests were growing in number and became increasingly difficult to manage. This eliminated the peer and regulatory pressures on holdouts. Therefore, without these pressures, there was less reason for creditors to follow the old rules.
Vulture funds were generally non-existent until the mid-1990s due to how sovereign debt was held. Sovereign debt traditionally had been held by bank syndicates, and these syndicates understood that a rush to collect debt immediately or a holdout by any creditor would serve none of their interests. Furthermore, these banks shared some common interests, such as a desire to secure future business from these debtor countries and a desire to follow the desires of bank regulators. Filing lawsuits to enforce debts would be contrary to those interests, and therefore, the banks stopped litigation by exerting peer pressure on fellow institutions. Creditors, therefore, did not sue to enforce debts. Any holdout creditor or vulture fund would be blacklisted from international banking. Furthermore, many national governments also prevented debt holders from embarking upon a road towards becoming vulture funds. For example, banks progressing down a road towards becoming holdouts might be called by a governmental bank regulator, and be threatened with a financial audit and review.
By the mid 1990s, however, much of the syndicated debts had been converted to freely-traded sovereign bonds. In the early 1980s there was a major debt crisis in Latin America. The crisis begin in 1982, and from 1982 until 1989, there was a long period of restructuring sovereign debt. Many of these debts were held as unsecured syndicated bank loans. It was clear that by 1989, and despite the restructuring plans, the Latin American states were not in any better financial health. In response, U.S. Treasury Secretary Nicholas F. Brady designed the “Brady Plan” in an attempt to address the Latin American debt crisis in March 1989. Under the Brady system, loans were exchanged for sovereign bonds that could be freely traded. By 1998, it was evident that sovereign debt had converted from syndicated bank loans to securitized bonds. Brady bonds have become a generic term for bonds issued during sovereign debt restructuring, but specifically refer to the exchange of commercial bank loans for bond instruments.
With the creation of the sovereign bond market, non-bank investors began to hold substantial amounts of sovereign debt. Such investors with divergent interests were growing in number and became increasingly difficult to manage. This eliminated the peer and regulatory pressures on holdouts. Therefore, without these pressures, there was less reason for creditors to follow the old rules.
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