May 25, 2015    4 minute read

Peru: Agrarian Bonds Remain Unpaid

Peru: Agrarian Bonds Remain Unpaid

The issue of unpaid agrarian bonds has plagued the Peruvian government for the last three decades, impacting on the country’s ability to attract foreign investment and the price of sovereign bonds issued. In 1969 the Peruvian government, under the military dictatorship of Juan Velasco, passed the Law of Agrarian Reform; forcibly expropriating 9 million hectares of farmland and distributing them to 370,000 families. The owners of these lands were forced to accept agrarian bonds in place of their property. These bonds were issued in three classes:

Bond Class Interest Rate Maturity
Class A 6% 20 years
Class B 5% 25 years
Class C 4% 30 years


However, from 1980 onwards the Peruvian government defaulted on payment of the bonds due to the severe depression which saw hyperinflation reach 12,377% in 1990. As a result of this, the currency of Peru changed twice in six years, the Sol de Oro was converted to the Inti in 1985, this then changed to the current currency, the Nuevo Sol, in 1991. As the Agrarian bonds were issued in Sols de Oro, their nominal value was destroyed by the hyperinflation and subsequent currency changes (a Sol de Oro has a nominal value of a billionth of a Nuevo Sol).

For three decades the holders of agrarian bonds lobbied the government to resume payment, this was avoided through a series of legal maneuvers and as a result some of the bondholders sold their debt to foreign distressed securities funds. However, in 2013 the Constitutional Court decreed that the MEF (Peruvian Finance Ministry) was required to compose a formula to evaluate the current value of these bonds; which they did in January 2014.

As often happens when an organisation is given liberty to set the terms of its own obligations; the MEF has drastically undervalued the value of the bond repayments. The issue with their formula stems primarily from the fact that the MEF has created their own parity exchange rate rather than use internationally accepted models such as those provided by the ICP (International Comparison Program).

The MEF parity exchange rate attributes a dollar value at the date of issue to the bonds (issued in Sols de Oro). This is created by multiplying the official exchange rate at the time of issue by the ratio of the Peruvian CPI to the US CPI, then multiplying this again by the inverse of the real exchange rate. By multiplying the nominal exchange rate by the inverse of the real exchange rate the value of the dollarized amount is significantly decreased. This method was designed with the intention of reducing the effects of hyperinflation but instead has exacerbated them, multiplying the hyperinflated currency by the difference in real value between the sol and the dollar.

In addition to this, the MEF are using the one-year US Treasury rate to calculate the value of accrued interest, despite the bonds having maturities of 20-30 years. The MEF calculate this interest as accruing up until the end of 2013 although many bonds have not yet been redeemed.

Some economists argue that given Peru’s high GDP growth (averaging 6.4% in the last 10 years) the decision to default cannot be defended on economic grounds. The existence of a $9bn Fiscal Stabilisation Fund puts to rest the idea that the government is unable to honour their obligations; merely that they are unwilling to.

The APJBA (a Peruvian public interest group campaigning for bond repayment) protests that the current MEF formula will only pay 0.5% of the bond value which they estimate at $5.1bn. The movement has high profile backers; news site quotes Peru’s first woman Prime Minister Beatriz Merino;

“Peru today has a respected economy and aspires to be a first-world country. With that comes responsibilities. And one of those responsibilities is to honour its debts”

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