Hedge fund threatens to sue Peru over debt

A US hedge fund is threatening to sue Peru for payment of defaulted debts issued by its former military regime, sources said Friday, with one activist group condemning the action as "predatory."

Connecticut-based hedge fund Gramercy has threatened to sue Peru for a portion of $5.1 billion in unpaid bonds issued to compensate for land expropriations by the dictatorship, said sources with knowledge of the case.

Gramercy bought the defaulted bonds at a steep discount seven years ago, hoping to win full repayment -- a practice that drew criticism from Jubilee USA, a campaign group pushing for debt relief for developing countries.

Peru is in the spotlight this week as host of the annual meetings of the International Monetary Fund and World Bank, and Jubilee used the occasion to pounce on "predatory" actions by hedge funds.

"It's ironic that this threat is coming amidst global meetings in Peru that continue to try and stop this kind of predatory behavior," said executive director Eric LeCompte.

The group said Gramercy was threatening to sue Peru under a tribunal system established in a 2009 trade deal with the US.

Speaking on the sidelines of the IMF meetings, Peruvian Finance Minister Alonso Segura said his country would oppose any legal action outside its territory.

"That's not going to happen. Peruvian laws protect the government. There's no problem. This issue will be dealt with by Peruvian laws," he told AFP.

Gramercy told AFP it had sought a "consensual resolution" with the Peruvian government over the dispute.

But "we were told point blank by a senior Peruvian official: 'Make us care,'" Gramercy's chief legal officer, James Taylor, said in an email.

He alleged the Peruvian Supreme Court had decided in favor of the bondholders in 2013, but then changed its ruling after coming under pressure from the government.

He accused the court of using white-out to change the original printed version of its own ruling, which he called "illegal" and "shocking."

- Shadow of Argentina -

The potential litigation relates to bonds Peru's 1968-1980 military regime issued after expropriating millions of hectares (acres) from landholders.

Peru has launched a partial repayment plan on the bonds, but Gramercy is threatening to sue for more, Jubilee said.

Peruvian holders of the defaulted bonds meanwhile said they tried to organize a peaceful protest march outside the IMF meeting venues Wednesday but were refused permission by the Peruvian government.

"Peru must fulfill its legal, financial and moral obligations," they said in a statement.

The practices of so-called "vulture funds" that buy up countries' bad debts and sue for full payment has surged to the fore in South America because of the ongoing legal battle between Argentina and two hedge funds suing it in US federal court.

The New York court has ruled Argentina owes its creditors $7 billion and froze its other debt payments, derailing the deals Buenos Aires had reached to restructure the debt it defaulted on during its 2001 economic crisis.

Argentina, which rejects the court's ruling, refuses to pay, triggering a new default last year.

Unlike Argentina, however, Peru is currently a darling of international economic policy makers, who have praised its strong growth in recent years as the "Peruvian miracle."