In any event, far more debt is loaned each year as export finance and trade debt, not in bond issues… The whole issue of collective clauses in respect of severely indebted lower income countries is largely irrelevant.

Nor is the lack of commercial credits something to relish… A lack of commercial credit is causing Zambia far more problems than vultures ever did or will…

The reason commercial credits to Zambia (and Africa generally) were never more than a fraction of the total debt is because noone would export without sovereign guarantees… Why? Because their credit was bad. When the debts defaulted, the guarantees came into play and voila, sovereign debt.

Another reason the offical debt ballooned was that the bilateral (read official export credit agencies) and multilateral lenders kept accruing and compounding interest for thirty years and not rapidly writing it down and forgiving or selling back as the commercial creditors did…

The World Bank actually loaned many of the sub-saharan governments money to service debt to themselves… to preserve their credit rating.

The bilaterals and multilaterals did not cancel the debts they were owed until it became embarrassing that their debt service from Africa began exceeding their loans to Africa…

And to imply that Zambia’s credit rating means nothing to the world or Zambia is just silly…

More generally – have you not noticed, lads, the world has changed a bit? The days when this neoliberal guff about the benign and productive nature of international bond markets are in the past. To be talking about “the credit rating of the debtors” at this late date is to be seriously missing the point. The problem these days is the lack of credibility of the bond markets in Zambia, not the credibility of Zambia in the bond markets.

There does not seem to be support for the statement that the majority of litigation takes place in the context of government to government loans. According to the IMF literature, the majority of sovereign debt litigation involves commercial debt, not bilateral.

And Zambia used to have plenty of commercial creditors. They all sold their debt back to the government debtor, however, at eleven percent of principal… much less than what the Paris Club creditors were requiring at the time.

African countries need more government and private sector loans, not less. And if making government to government loans transferable is so bad, why do all Paris Club reschedulings continue to provide for their transfer and conversion?

It is fantasy to think that African countries can get along just with bilateral assistance.

The intention of multi and bilateral financing is to graduate sovereign borrowers from development assistance to the capital markets. Setting a different standard for severely indebted countries is not going to assist this effort. It will simply retard their progress.

Zambia wants more, not fewer, creditors. The idea that African countries do not want creditors is very strange. Ghana, Congo and Ivory coast have recently placed bonds in the market and other countries will soon. African governments and companies need more loans and investors in them, not less. Their bonds and debts need to be transferable to make it possible for investors to exit their positions. This supports their price and the credit rating of the debtors.

Patronising much? In fact, you don’t state these “reasons”, because you can’t because there aren’t any particularly valid ones. Just as there was no particular reason why sovereign bonds didn’t include orderly renegotiation clauses and provision for majority voting before about 2005 – it was just that nobody had thought to include them, and nobody wanted to be the first to include them.

In fact, there’s absolutely no reason to not include a no-transfers covenant in bilateral government lending, and considerable reasons of public policy to want to do so. There really are very few legitimate reasons why a borrower or lender might want their loans to be transferable. *Private sector lending* might be a totally different thing, but the majority of vulture fund litigation takes place in contexts like Donegal/Zambia, and countries like Zambia typically have very few or no private sector creditors.

If you are at this point thinking that maybe you are talking to someone who knows *really quite a lot* about sovereign debt (say, someone who was a civil servant dealing with international bond covenants for five years), you are right. Perhaps if you think some thoughts about this a little more, you can fly off to a land where people know what they’re talking about.

You are prehaps the most read financial blogger of your generation and you’ve earned that spot with indepth reporting covering complex financial topics. I must agree with other posters reguarding your seemingly polar opposite views reguarding the subordinate debt holders getting a larger recovery than senior-secured holders in the case of Chrysler and your defence of vulture funds.

How will companies in risky industries get the capital they need if investors at the top of the capital structue can’t handcuff their capital to real underlying assets?

Keep up the great work!

These “vulture funds” are doing on an international scale in essence what distressed-assets funds do in a more domestic contexts.

Such as the context of the Chrysler bankruptcy proceedings, right? Is railing against the one group “sillier” than railing against the other?

There are reasons why the sort of covenant you imagine is not standard in such cases, and the reasons will apply however much you might want to dream about “good things.”

Think nice enough thoughts and you can fly off to Neverland, right?

It would probably be a good thing if it were to become a standard covenant in government-to-government lending to emerging market countries like the Romania/Zambia loan in the Donegal case; you are not seriously trying to tell me that when Zambia borrowed money on an easy-terms vans-for-grain deal with a Communist state, it envisaged that the eventual repayment negotiations would be conducted with a hedge fund. Get off your high horse.

and this is a bit disingenuous, frankly:

[That’s why litigation is a last resort for vultures: anybody who thinks that they buy up this debt with the intention of litigating for repayment in full simply doesn’t understand the business model]

So their business model is to ask nicely? While the vulture funds always hope to get bought out or settle, the *threat* of litigation is really quite obviously key to the whole business model. You might as well say that busting kneecaps is a last resort for loan sharks, so anyone who thinks loan sharks intend to be violent simply doesn’t understand the business model.

(also, Zambia? “access to capital?” “equal-player status on the world stage?” these are HIPCs we’re talking about here, not Mexico or Argentina or somewhere.)