UPDATE 2-Peruvian court rebuffs request to delay land bonds ruling

Wed Jul 10, 2013 4:30pm EDT

By Teresa Cespedes

LIMA, July 10 (Reuters) - The chief of Peru's constitutional court on Wednesday rejected President Ollanta Humala's request that it delay a ruling that could force the government to finally pay billions of dollars in 40-year-old land reform bonds.

Oscar Urviola, the head of the court, said it was important to resolve the controversy over the outstanding debt to boost investor confidence. Peruvian presidents have resisted honoring the bonds since they were issued as compensation for land redistributed to the poor in the 1970s.

The court ruled the government must pay up 12 years ago and was expected to explicitly tell the executive branch how and when to pay as early as Tuesday.

Humala said in a televised interview on Tuesday that the court should abstain from ruling on "sensitive" topics such as the land bonds until Congress names new members to the court in coming weeks, suggesting the current court lacks legitimacy.

Lawyers and critics were quick to say Humala was meddling in the proceedings of the autonomous court. Urviola stopped short of calling his comments interference, but made it clear that the court would not shy away from controversial rulings.

"With my complete respect for the president, I have to say that the constitutional court does not agree with its proceedings being imposed upon or conditioned by external factors," Urviola said at a news conference. "It is a sensitive topic, yes, because it will obviously trigger a payment."

Conservative estimates say there are between $1 billion and $3 billion in land reform bonds. Other estimates say the liability is far larger, between $4.6 billion and $8 billion, or about 4 percent of gross domestic product.

Much hinges on the historical price index used to calculate the value of the bonds and the number of bonds outstanding.

The agricultural bonds were issued as compensation in the 1970s under a land redistribution program started by leftist dictator General Juan Velasco, who sought to take farms from the rich and hand them over to peasants in a bid to create a more equal society and redress the legacies of Spanish colonialism.

Many middle-class planters, banks and even workers were ensnared in the program, which caused Peru's agricultural output to collapse when 5,000 farms were seized between 1969 and 1981.

Since the 1990s, Peru has shed Velasco's left-wing economic model and become one of the world's fastest-growing economies, with free-trade agreements from China to Europe and investment-grade credit ratings.

But it is unclear how paying the land bonds would affect Peru's credit ratings. Cleaning up a so-called fiscal skeleton would be seen as a plus, but paying off the bonds would also officially put them on the government's books.

Despite the constitutional court's 2001 ruling in favor of bondholders, the government under several administrations has balked at making payments, worried about lacking the cash.

Urviola said the court was still studying the best way to make the government comply with its previous ruling and a decision would likely be made "in coming weeks."

"This court is going to dictate the pending resolution taking into account all necessary aspects so that the sentence is honored, and so that it does not cause any problems for the Peruvian state as it fulfills its obligations," he said.

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