Hedge fund pressures Peru to pay back 40-year-old debt

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A US hedge fund is ratcheting up its campaign to convince Peru to repay $5bn of long-defaulted 40-year-old bonds by threatening to sue the country under a free-trade agreement with the US.

Gramercy, an emerging markets-focused hedge fund, has snapped up a series of bonds issued to landowners after their property was seized by a leftwing junta led by General Juan Velasco.

After seizing power in a 1968 coup, he started a redistribution programme, taking land and offering compensation in the form of so-called “Agrarian Reform Bonds”. But the deteriorating economy eventually forced the government to stop servicing the debts.

The Peruvian courts have long ruled that the government should repay the bonds. But a series of administrations have baulked at the cost and sought to defer or reduce the payments.

Gramercy is now clamouring for Lima to pay more money, arguing the current repayment plans short-change creditors — including many Peruvians — and is a stain on the country’s creditworthiness.

“While recently seeking a consensual resolution, we were told point blank by a senior Peruvian official: ‘Make us care’,” said James Taylor, partner and chief legal officer of Gramercy. “Given Peru’s indisputable ability to pay a $5bn debt, this clearly is a voluntary and selective default.”

The Peruvian government has in the past offered to repay the bonds at their face value, which is now minuscule after extensive inflation and devaluation. The country’s highest court, in 2013, reaffirmed a previous ruling that an adjusted value was required, but it allowed the government to pay less than what the various creditors have sought — perhaps as little as $400m over many years. Creditors say they are worth about $5.1bn.

However, after concerns recently arose locally over how the Constitutional Court reached its decision, Gramercy has decided to ramp up a campaign for the old defaulted land bonds to be exchanged for new, long-dated sovereign bonds, arguing this would only add modestly to the country’s indebtedness.

“If the [president Ollanta] Humala administration continues to refuse to engage, we will be forced to pursue our legal remedies, which include the possibility of commencing an international claim against Peru under the US-Peru Free Trade Agreement,” Mr Taylor said.

Gramercy’s campaign comes at a sensitive time for Peru. The country is wrestling with a slowdown in its commodity-driven economy and deadly riots in areas opposed to large mining projects. It is also trying to maintain its credibility as a regional star during the annual meetings of the International Monetary Fund and the World Bank, which kicked off in Lima this week.

But a senior economic official in president Humala’s administration shrugged off Gramercy’s threats. “These are bonds issued under Peruvian laws and the highest legal entity has ruled we have to pay with a certain methodology, and we are doing that unquestioningly.”

“Evidently there are some bondholders that would like to be paid differently, but Peru is being utterly respectful of its legislation.” If Gramercy want to make a ruckus, the source added, “they’ll have to make it under Peruvian legislation”.

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