Peru's Selective Default: A Stain on its Creditworthiness

In the 1970s, while a leftist military dictatorship ruled Peru, more than 22 million acres of cultivated or grazing farmland -- one-third of Peru’s total agricultural acreage -- were expropriated from thousands of large owners as part of a property reform intended to benefit up to 400,000 landless peasant families. The compensation provided to landowners was miserly, however: on average, it was less than one-tenth the then-prevailing market price of water-accessible, cultivated land. Moreover, about 85 percent of total recognized land values were settled not in cash but with long-term Agrarian Debt Bonds, which committed future governments to honor fixed coupons on obligations maturing in 20 to 30 years. These bonds became worthless during the 1980s, however, because hyperinflation raged and the Peruvian currency lost most of its value. In the wake of the filing of hundreds of lawsuits seeking judicial redress, in 2001 the country’s Constitutional Tribunal ruled that the government should resume payment of the land-reform debt after updating its nominal value on an actuarial basis. And yet, successive administrations did not act on this ruling, despite the fact that since the mid-1990s Peru has exhibited vigorous economic growth, significantly strengthened public finances, and substantially improved creditworthiness, such that governments have had more than the necessary ample fiscal resources to redeem the land-reform bonds at their full, original value. This paper examines the evidence and concludes that we are in the presence of a case of blatant unwillingness to pay, one which undermines Peru’s claim to be a nation that is creditworthy, investor-friendly, and respectful of the rule of law.