NY legislation would make it harder for bondholders to sue defaulted sovereign countries

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Another amendment introduced Monday would differentiate conventional creditors from “vulture funds” in emerging-market restructurings. 

 

The so-called champerty doctrine is intended to make “clear that it is unlawful for a minority of bad faith creditors to use New York law to sue and profiteer from the distressed debt of struggling countries,” groups backing the bill said Monday in a statement. 

 

The amendment specifically targets funds that buy sovereign debt for cheap with the intent of pursuing litigation, according to New York Communities for Change, one of the nonprofits backing the bill.

 

Read more: New York Bills Spur Sri Lanka Creditors to Mull Bond Changes

 

Separately, Albany is pushing a bill known as the Sovereign Debt Stability Act, which, among other things, would cap the amount private creditors could recoup during a restructuring. The proposal, which stalled last year, has been criticized by trade associations representing institutional investors, who say it would result in higher upfront borrowing costs

 

https://www.bloomberg.com/news/articles/2024-05-20/new-york-bills-aim-to-cut-9-interest-rate-on-defaulted-em-debt

 

The lead in the article discusses legislation to reduce the mandatory interest rate on foreign defaulted debt from 9% to current long term rates (5%), which doesn't seem to have much opposition. It's clearly a benefit for the borrowers, but Wall Street doesn't seem too opposed. I'm assuming their position is that it will be factored in to new financings so it probably won't affect countries ability to raise more debt. And that since it only applies in defaults which are relatively rare, and only reduces rates 4%, it probably won't add much to new bond issue rates.

 

More concerning is the part I quoted. Champerty doctrine is an ancient prohibition against having strangers without a bonafide interest in a lawsuit helping fund it in return for proceeds. Using it to prohibit a minority bond holder from suing for payment they are legally owed seems extremely wrong-headed, and ignorant of unintended consequences. If you are worried about "struggling countries" making it easier for them to default on their debts isn't going to help. Its going to increase the rates investors will demand in the future, knowing that if a default occurs that they'll be forced to sell their bonds at significantly larger discounts.

 

Not normally a conspiracy theorists, but this is appears to be huge handout to countries that already have roughly $800B in outstanding debt issued on Wall Street, especially those who've already defaulted. Their savings on being able to throw out lawsuits over existing defaults could easily be billions. So how many of these "non profits" backing the bill have taken in contributions from international debtors? The ROI on throwing a few million at key community groups and key legislators to get this legislation passed would be immense.