When a Government Does Default, Getting your Money Back Is Not Easy—“Vulture Funds” Can Try To

When a government does default, getting your money back is not easy. Ten years after the government of Argentina defaulted on $81 billion of bonds issued in dollars and sold to international investors, some creditors have still not agreed to the loss that was imposed on them. The government of Argentina had made a take-it-or-leave-it offer: accept 35 cents on the dollar, or you will get nothing. Some 93 percent of the bondholders ended up accepting the offer: better a 35 percent settlement than nothing. The remaining 7 percent rejected the offer, and have been trying since then to force the government to pay the full principal of the bonds plus accrued interest. Some of the original holders have chosen to sell their bonds, so that the current holders are not always among the original 7 percent. Many bonds were sold on the secondary market to so-called vulture funds, which have spent millions trying to get a full reimbursement from the Argentine government. Vulture funds are hedge funds (more risky investment funds) that buy distressed assets that have fallen to a fraction of their value, wait for the issuer to go bankrupt, seize its other assets, and try to make a profit by reselling them. The problem is that nobody can force sovereign states to go bankrupt and to be sold in pieces.

—Pierre Lemieux, The Public Debt Problem: A Comprehensive Guide (New York: Palgrave Macmillan, 2013), 2.