Unfortunately, Peru has taken a series of actions over the years to shirk responsibility for repaying the bonds, creating a legacy of breaking the public’s trust. Many of the actions involved a sleight-of-hand to make it look as though Peru was addressing the issue, when in reality the actions devalued the bonds in some way before they were repaid; other moves stripped bondholders of their legal rights.
- Most egregiously, the government originally proposed repaying the bonds at their face value, which is a farce. Due to Peru’s years of hyperinflation and currency devaluation, the face value of the bonds today is virtually worthless – it bears no relation to the value of the land that was taken or the value of the bonds that were given out at the time. That’s because those bonds were based on an old currency, the Sol Oro, which today is worth one-billionth of what it was in 1969. The country’s Constitutional Tribunal ruled this proposal unconstitutional.
- The government also proposed replacing the bonds with new sovereign debt with a maturity of 30 years and no interest, converting a compulsory interest bearing loan into a compulsory interest-free loan and resetting the clock on repayment. The Constitutional Tribunal ruled that this could be an option provided that bondholders retained the right to seek full compensation through legal remedies.
- More recently, in January 2014, Peru’s president, along with the then-minister of economy and finance (and now ambassador to the United States), issued new executive decrees that purport to update the bonds to their current value and provide for payment to bondholders. But instead of using the consumer price index (CPI) method Peru typically uses, the decrees utilize a new dollarization formula that offers bondholders a trivial fraction – less than 0.5 percent – of what they are owed.
- To put that in context: a 100,000 Soles Oro bond issued in 1973 with 55,000 Soles Oro outstanding would today be worth a trifling 1.84 Nuevos Soles, or $0.58 – not even enough to buy a morning newspaper in Lima. Using the CPI method, that same bond would be worth 751,167 Nuevos Soles or $236,327.
- To put that further in context: according to former Peruvian Minister of Economy Ismael Benavides, Peru conservatively owes $5.1 billion with respect to the agrarian bonds using the CPI methodology. According to a report by an internationally respected accounting firm, the total amount payable by the government, calculated under the dollarization methodology, would be no more than $12-24 million. This same internationally respected accounting firm also estimated the total value of land expropriated by Peru during the agrarian reform at $42.4 billion.
- In the 2014 decrees, Peru also tried to compel bondholders to accept a deal that would require them to waive their legal rights, agree that the government could unilaterally decide not to pay the bonds, and discriminate against bondholders based on their age and other factors.
- Peru also claims that the most recent decrees issued by the MEF merely comply with a July 2013 Constitutional Tribunal decision. The July 2013 Constitutional Tribunal decision is a total farce. The July 2013 decision was decided with a “majority” of 3 out of 6 justices after a new draft was substituted at the last minute in place of a prior draft decision, which had been worked on for two years and had been approved by a true majority. The substitution was a result of undue influence and public pressure from the Peruvian President. Further, the then and current President of the Constitutional Tribunal, Oscar Urviola, has admitted the July 2013 decision was doctored, including through the use of white-out to erase language and the signature of a justice on the tribunal.