US Hedge Fund Sues Peru for Payment of Military Regime's Debt

A U.S. hedge fund is suing Peru for repayment of US$1.6 billion in unpaid bonds issued by the country's former military government.

In the lawsuit filed Thursday, Gramercy Funds Management argues that it hasn’t been fully reimbursed for land bonds dating back to the 1970s agrarian reform.

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“For several years, Gramercy has attempted to engage in negotiations with the Peruvian government to find a solution for the land bond debt,” the hedge fund said in a statement.

Gramercy, which has US$6 billion under management, says it owns about 10,000 individual land bonds, which were purchased in 2006 for pennies on the dollar. It is now demanding full repayment, a practice common among so-called "vulture funds."

In conjunction with the legal proceedings, the Connecticut-based hedge fund has also been stepping up its lobbying efforts against Peru, such as attempting to embroil the rating agency industry into its dispute.

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The Peruvian government has issued a statment accusing Gramercy of attempting to “harm Peru and Peruvians." It argues 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 in the statement.

Peru is in the middle of a presidential election, which pits Keiko Fujimori, the daughter of imprisoned former dictator Alberto Fujimori, against Pedro Pablo Kuczynski, a former Wall Street banker.

The tactic is similar to one employed by another U.S. hedge fund, Elliot Management, which has used the U.S. legal system to compel the government of Argentina to repay the full amount of its own defaulted bonds.