For fixed-income investors, hell is other bondholders

ALTHOUGH OLD enough to feel nostalgic about classic video games, Buttonwood was never a fan of Pac-Man. Yes, eating pellets and eluding colourful ghosts made a change from shooting waves of space invaders. But the game never grabbed him. And its name made no sense. The original, "Puck Man", was apparently altered to stop arcade vandals changing the P to an F.

Emerging-market investors may share those cool feelings. To them, “Pac-Man” is the name for a divide-and-rule strategy pursued by governments seeking to puck their bondholders. Fear of the tactic haunted Argentina’s $65bn-debt talks, which have eventually come to a deal that most bondholders looked likely to accept by August 28th, after The Economist went to press.

A government that cannot pay its debts typically offers to swap its bonds for new ones with gentler terms. Under modern “collective-action” clauses, it can group together any bond series it wants to exchange and take a vote of all their holders. If a large majority agree to the swap, it becomes binding for all. This stops a few mercenary creditors free-riding on the generosity of others by holding out for a better deal, hoping that the government will pay them more once it has paid everyone else less.

The absence of such provisions allowed a colourful group of hold-outs to...