Sovereign Piracy lays bare the recent efforts of vulture investor Elliott Associates to holdup the Government of Peru. When Peru tried to restructure its Brady Bonds Elliott launched global litigation to tie up the money and force Peru into default. A Brussel's court brought Peru to its knees and forced it to settle with Elliott. Elliott's leverage was based on its novel interpretation of the so-called pari passu clause which requires a debtor's creditors to rank equally.
The article first explains why, from an ex ante bargaining perspective, sovereign debtors would be loathe to agree to pari passu clauses with the interpretation given by the Brussels court. Next, the article looks to the literature and case law construing sovereign and corporate debt and demonstrates why the Brussels interpretation is wrong, results in a windfall to holdout creditors, and is harmful to the majority of other creditors. The article then discusses New York bond interpretation law and the need for the Brussels interpretation to be challenged. The article concludes with some important insights about market changes that will result if the Brussel's interpretation is allowed to stand.