However, today the debt remains unpaid, and the government of Peru has yet to clarify means and ultimate value of compensation to current bondholders.
Ownership of these parcels – formerly owned by both individuals and legal entities – initially passed to the State and was subsequently distributed among peasants and campesinos organized in cooperatives and agricultural associations.
[2] Those whose property was expropriated were entitled to compensation based on an appraisal conducted by the State and payment of the fair value was required by constitutional mandate.
[6][7] In a 2006 opinion, the Congressional Agricultural Committee noted that the Ministry of Finance had made a "net bond placement" equal to "13.285 billion" old sols (~ US$380 million).
[10] In their publication Quantitative Aspects of the Land Reform, Caballero and Alvarez indicate that “the total amount of the expropriations – slightly over 15 billion sols – is pretty low,” as it corresponds to “approximately half of the national budget for agricultural loans in 1977,” and “only 20% more than the national investment in irrigation in 1978.”[11] During the 1980s, Peru began defaulting on the payment of the Bonds’ coupons.
This default has been attributed to the deteriorating economic situation, which resulted in terrible hyperinflation (as described in paragraphs 45 and 46), the winding down of the Agrarian Bank that took place from 1992[12] and the currency switch from Soles Oro to Inti.
[15] In 1996, however, the Engineers’ Bar Association asked this Tribunal to declare Law N° 26597 unconstitutional on the basis that it affected the valuation criteria and payment for expropriated lands enshrined in article 70 of the Constitution.
The Tribunal declared article 1 of Law N° 26597 unconstitutional because “the criteria for the valuation and payment of the adjusted value of the expropriated land” responds to “a sense of basic justice, in accordance with article 70 of the Constitution,” which that law ignored when it provided for payment of “the face value amount only.”[19] The Constitutional Tribunal also found article 2 of Law N° 26597 unconstitutional because it attempted to validate the fair value system presented in the Bonds while treating this value “in an unalterable way that failed to take into account the effects of time.”[20] The Tribunal further declared these legal provisions unconstitutional “as they violated the valuation criteria inherent to property.”[21] The “sense of basic justice” to which the Tribunal's March 2001 Decision referred arose from the effect of hyperinflation on the value of the Bonds during the long payment period the State had imposed.
[26] In a 2006 report, a Congressional Committee opined that the State had “acknowledged the debt and promised to pay it” by issuing the Land Reform Bonds, but “as the value of the currency deteriorated,” it had become “essential” to apply an adjustment factor that “to the extent possible, would allow the value of the confiscated assets to remain constant.”[27] While the Engineers’ Bar Association unconstitutionality claim was pending, in 2000, Peru passed Emergency Decree N° 088-2000, recognizing the land reform debt and purporting to implement a mechanism for crediting and paying it, using new bonds issued by the Public Treasury.
[28] To adjust the value of the Land Reform Bonds, Emergency Decree N° 088-2000 ordered them converted “to U.S. dollars at the official exchange rate in effect on the issue date,” applying “to the result an annual interest rate of seven point five percent (7.5%) up to the month immediately prior to the date the calculation was made, compounded annually.”[29][30] Emergency Decree N° 088-2000 provided that payment would be made by swapping the Land Reform Bonds for newly issued sovereign debt with a maturity of 30 years but with no interest.
It was argued, among other things, that the Emergency Decree violated the right to property; and the principle of judicial independence, by unlawfully interfering with proceedings that were pending before Peruvian courts dealing with the payment of compensation for expropriations; and the right to due process, since it attempted retroactively to impose a procedure that did not exist at the time the underlying events occurred.
On August 2, 2004, the Tribunal upheld the independence of the judiciary and concluded that “the procedure governed by Emergency Decree N° 088-2000” should be interpreted “as an option that may be freely chosen by creditors as an alternative to the option of going to Court to demand payment of the adjusted amount of the debt, plus applicable interest.”[33] In other words, the Tribunal left open the possibility for Land Reform Bond holders to seek compensation before a competent court.
Similarly, with regard to the alleged violation of the principle of equality under the law – petitioners in that case argued that the Emergency Decree N° 088-2000 used an adjustment method “different from that normally provided for creditors”[34] under the Civil Code – the Tribunal held that there was no such violation so long as Emergency Decree N° 088-2000 was merely an “option” and was not mandatory.
Due to the Government's delay in resolving the Land Reform Bond problem, on October 5, 2011, the Engineers’ Bar Association filed a petition seeking enforcement of this Tribunal's Decision of March 2001, which had declared Law N° 26597 unconstitutional.
It reaffirmed its March 2001 Decision that expropriation without payment of fair value, or for which “only the face value was paid,” violated “a basic sense of justice” in accordance with article 70 of the Constitution.
[35] In its Ruling, the Tribunal reproachfully summarized the Government's conduct with respect to the payment of the Land Reform Bonds: “(…) although the Executive Branch initially showed willingness to honor the debt resulting from the expropriations conducted as part of the Land Reform [...] it later abandoned its efforts and to date the State has failed to establish criteria for the ‘valuation and payment of the adjusted amount of the debt,’ much less paid it.
On the contrary, as counsel for the Engineers’ Bar Association has shown, the Executive Branch, in various responses given to persons whose property was expropriated under the Land Reform, and through its government attorneys in claims filed to collect the fair price owed, has consistently denied the need to adjust the amount of the debt, given that there is no court or administrative order to do so, and the judgment of this Court ‘cannot apply to events that occurred before the judgment was rendered.’”[36] While the Tribunal’s decision reaffirmed that the Government is obliged to pay the current value of the debt, it also went further and considered several methods for calculating that current value.
Accordingly, in an act of purported balancing of the bondholders’ constitutional rights against this asserted threat to the general welfare, the Tribunal endorsed a different method: “calculating the adjusted value of the bonds by indexing the existing obligations to the equivalents in foreign currency” and then “applying the interest rate for United States Treasury Bonds.”[37] The Tribunal thus ordered that “within six months of this Ruling, the Executive Branch shall issue a supreme decree regulating the procedure for the recording, valuation and forms of payment of the land reform bond debt.”[38] Subsequently, on November 4, 2013, after interested persons and organizations – including the Association – filed motions for annulment and clarification of the Ruling, this Tribunal provided that although the MEF had the authority to issue Guidelines, “the process of adjusting the debt” should “under no circumstance” lead to a “result that reflects the practical application of a nominal criteria” and it reserved its jurisdiction to monitor calculation processes leading to a nominal payment.
[45] More generally, the Guidelines say nothing about the form of compensation bondholders might ultimately receive, leaving it unclear if the Government ever will pay in cash or will simply issue another bond with below market terms and long maturity.
The Guidelines then provide the same priority for people under 65 years of age, and thereafter, give preference to legal entities that are holders of the land reform debt, followed by legal entities that have acquired the bonds as part of the payment of obligations provided for under law, and finally, legal entities that acquired the obligations for “speculative ends.” The Guidelines do not explain why these classes were established, how any individual bondholder will be classified under them or precisely what use will be made of the classifications in paying bondholders.
[59] Egan-Jones cites the spotty track record of the government, specifically the ongoing default on the agrarian reform bonds.
12 of Lima brought criminal charges against Óscar Arturo Díaz Muñoz for “falsification of documents in prejudice of the State and of Carlos Mesía Ramírez”.
[66][67] The allegedly tampered ruling abruptly reversed multiple prior court decisions, leaving the agrarian bonds essentially worthless.
[68] Criminal charges cite direct evidence that a draft decision ruling in favor of bondholders was manipulated[69][70] with white-out to become a dissenting opinion of ex-judge Carlos Mesía Ramírez without his consent.
[71][72][73] In January 2016, as reported by The Wall Street Journal,[74] Columbia University law professor John C. Coffee[75] provided a legal opinion regarding the Peruvian agrarian bonds.
Such disclosures claimed that the country was “not involved in any disputes with its internal or external creditors;[78]” but, citing a memo, among other things, from the MEF identifying at least 400[79] pending lawsuits and 47[80] unpaid judgments, Coffee concluded that such statement would be in violation of the Securities Act of 1933.
[91] While Peru participates in OECD Bodies, Guidelines and Legal Instruments,[92] it is not currently a member and has not yet received a formal invitation to apply.
[94] Noting Peru's current dispute with holders of agrarian reform bonds, Peru's failure to repay runs counter to the OECD's commitment to the rule of law, sound debt management, free markets and unrestricted access by foreign investors as embodied in OECD principles, guidelines and rules.
The altered decision still exists on the Constitutional Tribunal's website[98] and its proposed dollarization methodology is still being relied upon as a method of payment in subsequent decrees.