Beginning in 1969, the government of Peru issued sovereign bonds as compensation for land expropriation during the Peruvian land reform under General Juan Velasco Alvarado. The government's aim was to redistribute land and reform the country's agrarian infrastructure. Payments on these bonds halted in 1992 due to periods of hyperinflation. The agrarian bonds have been recognized as outstanding sovereign debt obligations by Peru's highest courts, who have stated that these bonds should be repaid. However, the debt remains unpaid, and the government of Peru has yet to clarify means and ultimate value of compensation to current bondholders.
Land reform bonds Beginning in 1969, the Peruvian government under General Velasco implemented a series of measures aimed at transforming the country's social landscape by addressing the wealth-distribution system, particularly the economic and land ownership system. One such measure was the promulgation of Decree Law No. 17716 (the Land Reform Act) which sought to transform the country's land-tenure structure and replace the latifundio and minifundio system with redistribution of rural land.Decree Law N° 17716, Land Reform Act, Articles 1, 2 and 3: http://peru.justia.com/federales/decretos-leyes/17716-jun-24-1969/gdoc/ The land reform consisted of a series of expropriations of large rural parcels. 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.Decree Law N° 17716, Land Reform Act, Articles 56 and 67: http://peru.justia.com/federales/decretos-leyes/17716-jun-24-1969/gdoc/ 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.Political Constitution of Peru 1933, amended by Law N° 15242, published on November 30, 1964, Article 29: “Property is inviolable. No person may be stripped of his property except by court order or for reasons of public utility or in the interest of society, which must be legally established, and only after payment of the fair value. In the case of expropriations for reasons of Land Reform (...), the law may establish that compensation (...) may be paid in the form of bonds, the acceptance of which shall be mandatory (...).”
Page 194: http://www.derecho.usmp.edu.pe/10ciclo/corporativo/derecho_constitucional_economico/dr_alvarez_miranda/Kresalja_Clase_2.PDF The State promised to pay over time, with interest, by issuing and placing the Land Reform Bonds. Landowners had no choice in the matter, for the law made surrender of land and acceptance of the Bonds mandatory. The State, therefore, not only took the land but effectively compelled the landowners to loan the State the funds with which to pay compensation for the takings.
The Government ultimately issued three classes of Land Reform Bonds: (i) Class A, with 6% annual interest over twenty years beginning as of their placement; (ii) Class B, with 5% annual interest over twenty-five years; and (iii) Class C, with 4% annual interest over thirty years.Decree Law N° 17716, Land Reform Act, Article 174: http://peru.justia.com/federales/decretos-leyes/17716-jun-24-1969/gdoc/ These Bonds stated that they were payable annually in cash until maturity. They represent the State's obligation to pay the fair value of the land, which had the “State’s unreserved guarantee” pursuant to article 175 of the Land Reform Act.Decree Law N° 17716, Land Reform Act, Articles 173, 174, and 175: http://peru.justia.com/federales/decretos-leyes/17716-jun-24-1969/gdoc/
The website of the Ministry of Agriculture and Irrigation indicates that between June 1969 and June 1979, more than 9,000,000 hectares of land were expropriated, consisting of some 15,826 land lots. According to that source, this benefited approximately 370,000 families.El proceso de reforma agraria, Objetivos de la reforma agraria, Ministerio de Agricultura y Riego, available at http://minagri.gob.pe/portal/70-marco-legal/titulacion-agraria-en-el-peru/413-el-proceso-de-reforma-agraria .See also: Matos Mar, José and J. M. Mejía, La reforma agraria en el Peru, Lima: Instituto de Estudios Peruanos, 1980, p. 171. 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).Opinion issued on Draft Laws N° 578/2001-CR, N° 7440/2002-CR, N° 8988/2003-CR, N° 10599/2003-CR, N° 11459/2004-CR, and N° 11971/2004-CR, which proposes the “Legal Certainty for the Physical and Legal Restructuring of parcels affected by the Land Reform Process and Land Reform Debt Adjustment and Payment Act,” p. 13. http://bonosagrarios.pe/wp-content/uploads/2016/01/Dictamen-Comision-Agraria-de-mayo-2005.pdf . That report also indicated that "payments were made for 10.763 billion" sols of the principal and that there was an outstanding balance of some 2.521 billion sols, approx. ~ US$71.2 million.Opinion issued on Draft Laws N° 578/2001-CR, N° 7440/2002-CR, N° 8988/2003-CR, N° 10599/2003-CR, N° 11459/2004-CR, and N° 11971/2004-CR, which proposes the “Legal Certainty for the Physical and Legal Restructuring of parcels affected by the Land Reform Process and Land Reform Debt Adjustment and Payment Act,” p. 13. http://bonosagrarios.pe/wp-content/uploads/2016/01/Dictamen-Comision-Agraria-de-mayo-2005.pdf .
Ongoing default Pursuant to article 29 of the 1933 Constitution, which was valid when the Land Reform Act was enacted, landowners were entitled to the payment of fair compensation for the expropriated lands. Available sources on this topic indicate that the Land Reform Act did not set forth a fair method for assessing the value of the land, but that it indicated that the amount of the justiprecio would be set, among other ways, on the basis of the sworn declaration of self- valuation (autoavaluo), or “on the basis of the land’s economic capabilities” and that the Land Reform General Directorate fixed the justiprecio on the basis of the land's quality using a representative hectare sample for agricultural lands.José María Caballero and Elena Alvarez, Aspectos cuantitativos de la reforma agraria 1969-1979, Instituto De Estudios Peruanos 1980, p. 60.
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.”José María Caballero and Elena Alvarez, Aspectos cuantitativos de la reforma agraria 1969-1979, Instituto De Estudios Peruanos 1980, p. 61.
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 1992Decree Law N° 25478, May 8, 1992, http://docs.peru.justia.com/federales/decretos-leyes/25478-may-6-1992.pdf. The Agrarian Bank was declared (the entity responsible for the amortization and interest of the Bonds) in a state of liquidation. Liquidation was concluded by Resolution 078-2008-EF of September 27, 2008. and the currency switch from Soles Oro to Inti.On January 11, 1985 Law N° 24064 was published through which the Inti was adopted as Peru’s currency, http://peru.justia.com/federales/leyes/24064-jan-10-1985/gdoc/. Although Peru for a time created some individualized bank accounts and credited those accounts with nominal payments and deposits, it appears that it stopped paying the debt altogether – even on a nominal basis and unadjusted for current value – approximately in 1992.On the next day of the publication of Decree Law N° 25478, the payments to the creditors of the Agrarian Bank were suspended, including to the bondholders. There is no evidence that the bondholders were included in the list of creditors of the Agrarian Bank or that it was determined which entity of the Peruvian Government should make the payments of the outstanding coupons.
Law N° 26597 Through the enactment of N° 26597 in April 1996, the government took the position that physical delivery of the bonds was tantamount to effective payment.Legislative Decree N° 653, Agricultural Sector Investment Promotion Act, Article 15 and Fourth Transitory Provision. See also Law N° 26207, article 3, expressly repealing the Fourth Transitory Provision of Legislative Decree N° 653, thus derogating the market value principle. Law N° 26597 then basically provided that the “expropriation processes for purposes of Land Reform” would be implemented in accordance with Law N° 26207, which had already repealed payment of the fair market value principle 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 Engineers’ Bar Association argued that the land reform expropriations had actually been “seizures,” because landowners had received Bonds that were worth far less than the expropriated land, and that due to the “inflation process,” the value of the Bonds had been “eroded in relation to the actual value of the expropriated land.”Constitutional Tribunal of the Republic of Peru, Case N° 00022-1996-PI/TC of March 15, 2001, Background, paragraph 6, http://www.tc.gob.pe/jurisprudencia/2001/00022-1996-AI.html. The Constitutional Tribunal noted that Congress “denied and opposed” the Engineers’ Bar Association's petition, arguing that “the land reform bonds are valid payment and are governed by the nominal payment principle, under which the creditor receives the exact sum of money appearing on the bond, regardless of any changes in its purchasing power.”Constitutional Tribunal of the Republic of Peru, Case N° 00022-1996-PI/TC of March 15, 2001, Background, paragraph 7, http://www.tc.gob.pe/jurisprudencia/2001/00022-1996-AI.html.
On March 15, 2001, the Tribunal issued a landmark opinion. The Tribunal upheld the Engineers’ Bar Association unconstitutionality claim and confirmed the principle that the Land Reform Bonds should be adjusted in accordance with the valuation principle enshrined in article 1236 of the Civil Code and 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.”Constitutional Tribunal of the Republic of Peru, Case N° 00022-1996-PI/TC of March 15, 2001, Foundation 1, http://www.tc.gob.pe/jurisprudencia/2001/00022-1996-AI.html. 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.”Constitutional Tribunal of the Republic of Peru, Case N° 00022-1996-PI/TC of March 15, 2001, Foundation 2, http://www.tc.gob.pe/jurisprudencia/2001/00022-1996-AI.html. The Tribunal further declared these legal provisions unconstitutional “as they violated the valuation criteria inherent to property.”Constitutional Tribunal of the Republic of Peru, Case N° 00022-1996-PI/TC of March 15, 2001, Foundation 7, http://www.tc.gob.pe/jurisprudencia/2001/00022-1996-AI.html.