Peru's land-reform debt payout could be minimal, bondholders say

LIMA, July 17 Wed Jul 17, 2013 7:01pm EDT

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LIMA, July 17 (Reuters) - A Peruvian court's decision ordering the government to honor debt owed for land confiscated under a redistribution program 40 years ago will likely end with a smaller payout than previously expected, disappointing bondholders.

Local and foreign owners of the debt told Reuters on Wednesday that the resolution published by Peru's top court could allow the government to pay a fraction of what they had calculated, and according to one estimate - as little as $400 million.

Government and private estimates for the land-reform bonds had ranged from $1 billion to $8 billion before the Constitutional Court's decision. Past Peruvian presidents have resisted honoring the bonds, even after the court said 12 years ago that Peru should pay up.

Late on Tuesday the Court said the government must comply with its 2001 sentence and pay the outstanding debt at its current value and with interest within a decade.

The bonds were issued as compensation for land redistributed to the poor in the 1970s by leftist dictator General Juan Velasco, who sought to create a more equal society and redress the legacies of Spanish colonialism.

The court's long-awaited decision aimed to clear up that bitter chapter in Peruvian history, but it upset some original bondholders who held on to their papers for decades, as well as private creditors who snapped up the debt years ago hoping for large returns.

The office of President Ollanta Humala did not offer comment on Wednesday, but last week pressed the court to refrain from ruling on "sensitive" issues like the land bands until Congress decided on new court members.

Environment Minister Manuel Pulgar-Vidal called the court's decision a "mistake" at a time slowing global economic growth has squeezed government purse strings. Lawmakers ironically approved new Constitutional Court members on Wednesday after two years of political wrangling.

Ismael Benavides, a bondholder and a former finance minister, said the payment could end up between 15 and 20 percent of his previous estimate of $3 billion to $4 billion.

SMALLEST PAYMENT POSSIBLE

Benavides called one payment scenario permitted by the court "unreal" because it calculates the debt at a time when Peru's currency was devalued rather than using the date the land was expropriated as the baseline year.

"This reduces the payment to the smallest amount possible," he said. "And today that land is worth a lot of money."

After decades of turmoil, Peru's economy has boomed in recent years and the Andean nation has become a favorite among foreign investors, pushing up property values.

Furthermore, the Court's President Oscar Urviola said on local television Tuesday night that the government does not have to make the payments in cash - it could also pay with land or by issuing new bonds.

Jose Cerritelli, an economist with Connecticut-based hedge fund Gramercy, which owns some of the bonds, said the court gave the government "huge wiggle room" to make a smaller payment than he had expected.

Court members were split 3-3 on whether to pass the resolution, and the court's president ended up ruling in favor of land-reform bondholders.

The creditors still said they were disappointed.

Alfonso Chungo, a member of a Peruvian association of land-reform bondholders, said the court decision was written so that the government can fix interest owed to U.S. treasury interest rates rather than adjusted for inflation in Peru.

"Of course we are not happy," Chungo told Reuters. "The lowest interest in the universe is interest from the U.S. treasury, and that's the interest they want to pay us with."

Chungo said the government would likely end up paying 1.1 billion soles, or about $400 million dollars - 10 percent of what he thinks is owed.

The bondholders association in Peru is considering its next steps, Chungo said, and Benavides said creditors might try to sue Peru in a foreign or international court.

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