Peru hits back at US hedge fund over $1.6bn claim

Gramercy files for arbitration over long-defaulted bonds
The Peruvian flag flies outside an office building in the financial district of Lima, Peru, on Monday, Aug. 3, 2015. Peru's economy strengthened in the second quarter, expanding at the fastest pace in a year, as a surge in copper output makes up for falling investment. Photographer: Victor J. Blue/Bloomberg
© Bloomberg
Peru has accused a US hedge fund of “threats and blackmail” after it filed a $1.6bn legal claim against the Andean country over a batch of long-defaulted bonds.
Gramercy, a hedge fund that specialises in emerging markets, on Thursday filed a $1.6bn claim for arbitration against Peru under the country’s free trade agreement with the US.
In parallel with the legal proceedings, the Connecticut-based hedge fund has been ramping up a lobbying campaign against Peru, such as attempting to embroil the rating agency industry into its dispute.
In a statement the government said that Gramercy was attempting to “harm Peru and Peruvians” and argued that the timing of the formal filing — in the middle of the country’s presidential election campaign — was opportunistic.
“This is the latest attempt to discredit Peru, following similar past attempts, and mainly appears designed by Gramercy to call attention to their particular interests during the country’s current circumstance,” the finance ministry said.
The conflict dates back to 1969, when a leftist junta expropriated vast tracts of land from wealthy locals, compensating owners with “Agrarian Reform Bonds”. When the economy subsequently deteriorated the bonds were defaulted on, and the holders and their descendants have since fought for repayment.
Subsequent Peruvian governments have accepted the validity of the debt, but have disputed how holders should be compensated for devaluations and inflation that have left the original face value of the bonds close to zero.
Hoping for a big payout Gramercy has snapped up a big chunk of the bonds since 2006, but creditors say a controversial 2013 Constitutional Court ruling in favour of the government’s payment methodology will hand them as little as $12m out a theoretical $5bn value.
That spurred Gramercy to file a claim against Peru under a US free trade agreement, arguing that the “indirect expropriation” violated several articles of the agreement.
“Peru’s stonewalling and steadfast refusal to have any substantive discussions has left Gramercy no choice but to commence and vigorously pursue this arbitration and enforce its rights under the treaty,” Robert Koenigsberger, Gramercy’s chief investment officer, said in a statement.
Peru’s stonewalling and steadfast refusal to have any substantive discussions has left Gramercy no choice but to commence and vigorously pursue this arbitration
Robert Koenigsberger, Gramercy
The case has similarities to Elliott Management’s 15-year campaign against Argentina, which resulted in a big pay-off for Paul Singer’s hedge fund this year. But crucially the Argentine bonds held by Elliott were issued under US law and fell under the jurisdiction of the US courts, while the land bonds come under Peruvian law, complicating the situation.
Nonetheless, Gramercy hopes that the combination of the arbitration claim and making a nuisance could spur any new administration to take a more friendly approach.
Peru is in the middle of a presidential election, which pits Keiko Fujimori, the daughter of disgraced former rightwing president Alberto Fujimori, against Pedro Pablo Kuczynski, a former Wall Street banker.
“Gramercy could be a problem,” Mr Kuczynski told the FT recently. He pointed out that unlike Argentina’s battle with Elliott, the land bonds were issued under Peruvian law. However, he warned: “Still, lawyers can do miraculous things.”
His pick for finance minister, the Oxbridge-educated investment banker Alfredo Thorne, said: “What Gramercy wants is to take this into the international arena. It is a problem to face and not to sweep under the rug as it has been so far. We have to address the problem, but it is a problem that has solution.”
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