New York State Climate and Environment

Amid Global Debt Crisis, Albany Advances Bill to Rein In Hedge Funds Suing Poor Countries

Half of sovereign bonds are issued under New York state law, giving Albany lawmakers the power to shape how countries around the world face off with creditors.

Julia Rock and Colin Kinniburgh · June 4, 2025

National flags against the NY state capitol.

Senator Liz Krueger (left) and Assemblymember Jessica González-Rojas (right) sponsor legislation that could impact $800 billion in debt from developing countries. | Illustration: New York Focus

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In 2017, Puerto Rico told its bondholders that it could no longer pay them and filed for the largest governmental bankruptcy in US history. Hurricane Maria hit the island months later, further devastating the territory.

“Our members came to us — their relatives were losing their pensions, schools were closing, hospitals were closing, they didn’t have enough money for food,” said Alicé Nascimento, political director at New York Communities for Change, a grassroots group that includes members of the Puerto Rican diaspora.

More Puerto Ricans live in New York than anywhere else outside the territory, except Florida, and they wanted to do something about the unfolding disaster. “They came to us and said, what is it that we can do to support Puerto Rico and stave off the worst of the crisis?” said Nascimento.

Her organization and others realized that, besides being home to more than a million Puerto Ricans, New York’s courts were hearing many of the lawsuits that hedge funds were bringing against the territory to get paid on the bonds they held.

About half of sovereign bonds — tens of trillions of dollars’ worth of debt held by countries around the world — are issued under New York state law. Countries issue the bonds to raise money for infrastructure or other public expenses, promising to repay the buyers later with added interest. In recent decades, some hedge funds have adopted strategies of buying distressed sovereign debt and then aggressively suing for repayment when countries default, often in New York courts.

Now, Albany is weighing a bill backed by New York Communities for Change and other progressive groups that seeks to rein in those investors — sometimes called “vulture funds” — by reviving an old defense against the lawsuits. It would also lower the interest rate on defaulted debt, lessening the incentive to drag out litigation. Bloomberg estimates that the legislation would impact about $800 billion in debt from developing countries.

Advocates say the bill offers lawmakers in New York, one of the richest places on earth, a way to address an urgent problem confronting some of the poorest. While the restructuring of Puerto Rico’s debt was completed in 2022, many developing countries — from Jamaica to Pakistan — face burdensome and growing debt.

“When we say there’s a debt crisis, it’s not just a financial crisis, it’s a development crisis,” said Joseph Stiglitz, a professor at Columbia University and the former chief economist of the World Bank, who is supporting the legislation. “So many countries are spending so much servicing their debt that they can’t invest in growth and infrastructure and health and education.”

Developing countries’ debts to foreign lenders has reached a new high, with 3.3 billion people around the world living in countries that spend more paying off interest on loans than they do on health or education, according to a United Nations report published last year. Foreign investment funds own an increasing share of that debt.

The issue is particularly acute in the countries most vulnerable to climate change, which have struggled both to rebuild adequately from disasters and to finance the transition to cleaner energy as they prioritize paying off their debts. Extreme weather can fuel a vicious cycle of borrowing that becomes harder and harder to repay.

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“Debt rises, and therefore you have to do things like … accelerate mining, or accelerate oil and gas production, which in turn accelerates the climate crisis, which leads to disasters, which leads to increased borrowing needs,” said Patrick Bigger, research director at the Climate and Community Institute, a progressive-leaning think tank. “That’s the vicious cycle.”

The New York bill to curtail litigation after defaults passed the Senate last year but did not get a vote in the Assembly. Its backers hope Assembly Speaker Carl Heastie brings it for a floor vote this year. Heastie did not respond to a request for comment.

“We had a very positive meeting with the [Assembly’s] internal staff,” said Jessica González-Rojas, the bill’s Assembly sponsor. She said she is “hopeful” the bill will reach a vote.

The bill would walk back a decision made by Albany two decades ago in the face of a fierce lobbying campaign by the financial industry.

At issue is an arcane legal doctrine called “champerty,” which limits third parties from financing lawsuits they are not party to.

In the sovereign debt context, champerty is supposed to stop financial institutions from buying bonds with the intention of suing to get paid. In practice, that often involves hedge funds buying defaulted debt at very low prices, then fighting debtors in court for years to get repaid. During restructuring negotiations after a default, when creditors and the country come to repayment terms, many lenders accept repayment at a fraction of the initial bond amount without litigation, while the “champertous” creditors sue to get paid more.

In the most famous case of that strategy, the hedge fund Elliott Management reaped a profit of more than $2 billion buying Argentina’s defaulted debt — a return of nearly 400 percent — after a prolonged legal battle that involved a subsidiary of the hedge fund seizing one of the country’s navy ships.

“Countries are spending so much servicing their debt that they can’t invest in growth and infrastructure and health and education.”

—Joseph Stiglitz, Columbia University

Critics have characterized the playbook as immoral because financial firms can make substantial profits while the sovereign borrowers impose austerity measures to make the payments. “They want to squeeze … blood out of a stone,” said Stiglitz.

The strategy also hasn’t necessarily always been legal. In 1998, before the Argentina case, Elliott was found guilty of champerty during the restructuring of Peru’s debt.

Then, in 2004, Elliott and other hedge funds successfully lobbied the New York legislature to roll back the champerty defense. “As a pretty new senator, my gut instinct was, something’s wrong here,” said bill sponsor Senator Liz Krueger, who was first elected in 2002.

Her aim now is to “undo the damage that was done by the state of New York in 2004.” That law blocked countries from using the champerty defense for claims of more than $500,000.

The current version of the bill restores the champerty defense and applies it to creditors that have a track record of buying distressed debt, refusing to cooperate in negotiations, and suing to get paid.

The bill “is written to narrowly apply to those that have a notorious record,” said Gregory Makoff, an expert on sovereign debt at the Harvard Kennedy School. It’s also about deterrence, he said: “The idea is that if some new young investor wants to go ask his boss for $50 million to try and make money through a series of lawsuits like Elliott did in the past, his boss will say, ‘But you could lose on champerty, I’m not going to put the money on it.’”

The financial industry has argued that the legislation could increase the cost of borrowing for countries. If creditors don’t think the bond agreements are enforceable, they won’t buy them — or they’ll demand more favorable terms.

The bill would also lower the interest rate on defaulted debt. The current interest rate under state law is 9 percent, which means that after a country defaults on its debt, the amount compounds at a rate of 9 percent per year until creditors reach an agreement on the repayment terms. The legislation would instead tie the rate to US Treasury bond yields, currently about 5 percent.

In recent years, lawmakers have also advanced a bill that would more radically change the rules of sovereign debt restructurings. But that legislation, which would give indebted countries more say in how they renegotiate their loans, faced widespread backlash from the financial industry. Advocates have focused their energy this year on passing the more limited champerty measure.

Advocates and Krueger said that Elliott Management has been lobbying behind the scenes to oppose the bill. Elliott did not respond to a request for comment. The Securities Industry and Financial Markets Association (SIFMA), a financial industry lobbying group that publicly opposed the bill last year, also declined to comment. Both Elliott and SIFMA are registered to lobby the legislature this year.

Krueger is confident the bill will pass the Senate again. But, she said, “you always have the problem of too many bills, not enough time, and this year it’s really a problem because we were 40 days behind on the budget,” referring to the state passing its final budget bills weeks after the April 1 deadline.

The bill’s prospects are less clear in the Assembly, but advocates are optimistic. “It’s been five years” of advocating for the legislation, said Nascimento of New York Communities for Change. “Now, when we mention sovereign debt, [legislators] aren’t confused anymore.”

For some lawmakers, it’s personal.

“My mom’s from Puerto Rico, my dad’s from Paraguay … my grandmother’s from Argentina,” all places that have been destabilized by debt crises in recent decades, said Assemblymember González-Rojas. “We can help a global crisis by passing a law in New York state.”