Magazine article Global Finance

Collecting on Peru's Sovereign Debt

Magazine article Global Finance

Collecting on Peru's Sovereign Debt

Article excerpt

SOVEREIGN DEBT

Fujimori may have run, but Peru's sovereign debt can't hide from US creditors.

Peru's president may run but the Peruvian national debt apparently can't hide. A recent court decision awarding a New York hedge fund all the US-based assets of an agent bank of the Republic of Peru could show the way for other foreign creditors to secure debt repayment by the governments of developing nations.

This unusual case against Peru had a seemingly common history. Elliott Associates, a New York hedge fund, in 1996 purchased some $21 million of the working capital debt of Lima-based Banco de la Nacion and Banco Popular del Peru. Later that same year Elliott sued for repayment by the two banks and the Republic of Peru, which had guaranteed the debt.

Banco Popular went bankrupt before the lawsuit was settled, but Banco de la Nacion and the Peruvian government fought the suit until this year. The defendants' arguments included the claim that Elliott had violated New York State law by purchasing the debt with the intent of filing a lawsuit. So much for intent. In October the Second Circuit US Court ofAppeals awarded Elliott all of Banco de la Nacion's assets in New York State. Faced with the verdict, the Peruvian government settled out of court for $58 million.

The case is unusual because Elliott was able to obtain a judgement for all the US assets of Banco de la Nacion, says Farina Zarin, a vice president and senior analyst at Moody's Investors Service, in New York. "That an investor may have this option available to it turns his suit from an academic and avenging 'I told you so' exercise to a more lethal weapon, lending this disconsolate investor's bark a bit more bite," she says.

This legal bite could leave a lasting mark. "It's still a bit early to see the ramifications in the courts, but discussions are percolating in the legal community as to how sovereigns and investors who accept a sovereign's exchange offer can thwart the legal attacks of those investors who do not accept these offers," says Zarin. …

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