Washington DC - A US hedge fund is threatening to sue Peru for $5.1 billion over decades-old military debts it bought. The fund, Gramercy, argues the Peruvian government's current repayment plan is inadequate and that it will sue Peru through a tribunal system embedded in a 2009 US-Peru trade agreement if payments do not increase. The debt dates back to a 1970's Peruvian military government that appropriated land and then issued bonds as compensation. Despite recent economic growth dubbed the "Peruvian Miracle," nearly one quarter of the country's population still lives in poverty.
The threat comes as the World Bank/IMF Annual Meetings begin in Lima, Peru.
"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 Eric LeCompte, executive director of the religious development coalition Jubilee USA. LeCompte serves on UN finance expert groups. "This kind of market behavior causes financial crisis and destabilizes economic growth."
Peru's highest court ruled in 2013 that the government must honor the bonds but did not require it to pay Gramercy the full amount the fund claims it is owed.
The trade tribunal that Gramercy threatens to use is called an Investor State Dispute Settlement mechanism or "ISDS." In 2013, a Slovakian financial firm used free trade agreements between Greece and both Slovakia and Cyprus to sue Greece over debt claims. ISDS tribunals allow private entities to sue countries for violating free trade agreements and apply economic sanctions to countries found liable. Some type of ISDS trade tribunal is supposed to be a part of the recently signed Trans Pacific Partnership.
"It's important that trade agreements benefit the most vulnerable and not these predatory funds," noted LeCompte. "As a development organization, we understand how important trade is for economic growth, but these trade tribunals remain our number one concern around trade deals."