Government Unhappy with Constitutional Court Ruling on Agrarian Bonds

Urviola, Oscar. Constit.CourtThe Constitutional Court’s ruling this week that Agrarian Reform bonds are to be paid, 40 years after farms and land were expropriated  by General Juan Velasco’s military regime,  has not only been overshadowed by the political fracas of questionable decisions by Congress this week but is being pushed back by the government and even its procedural validity is being criticized.

The Court, presided by Oscar Urviola, has given the government eight years to make good on the bonds that were issued as compensation to landowners whose land was confiscated in the nationwide Agrarian Reform in the 1970s, which expropriated close to 9.5 million hectares in 16,000 large farms and tracts of land.  The bonds were issued with maturities of up to 30 years, but the government defaulted on the bonds after a state-owned bank closed.   The Fujimori government in the 1990s recognized the need to redeem the bonds but did not move further on the issue, and in 2001 the Constitutional Court ruled that they should be paid.

However, every government has successively argued that it is financially unable to pay the bonds without breaking the bank.

President Humala’s government has also been concerned, and foreseeing a possible decision by the Constitutional Court, has been calling for prudence over the past month. The President himself and the Minister of Justice, Daniel Figallo, asked the Court “not to rush” and to leave the decision to the new Court members, who were due to be elected at any moment.

The plea for payment of the agrarian bonds was filed with the Court in 2011 by the Peruvian College of Engineers.

The Court ruling gives the government six months to determine how it will register, update and pay the bonds, and another two years to actually recognize each bond holder and calculate the amount owed.  It then has eight years in which to pay the value, which the Court rules should be set in 1970s dollars , with U.S. Federal Reserve interest rates.

With interest payments, the size of the debt is estimated at approximately $8 billion, payable to some 160,000 bond holders.  Without the interest payments, the sum would be closer to $1 billion.

“Justice is being done here… General Velasco himself, when he executed the agrarian reform, assured that the land holders would be paid, something that no successive government has ever done,” said Ismael Benavides, a former cabinet minister in two administrations and an agribusiness investor.

Many of the original landowners have, over the years, sold their bonds for a fraction of the original price, faced with little hope of ever being paid.

The president of the Constitutional Tribunal, Oscar Urviola, said the government’s payment of the defaulted bonds does not all need to be in cash. He said that in addition to cash, compensation can be in the form of land and government bonds.   The payment, the Court rules, should first be made to original bond holders and their heirs and individuals over the age of 65, and then to companies or institutions.

Economy and Finance Minister Luis Miguel Castilla said that “given the potential economic impact” of the ruling, the government will study it “with great responsibility.”

“What we have to preserve is a large asset that has cost all of us Peruvians a lot of effort, which is to maintain solvency, good fiscal management, fiscal prudence and international credibility,” Castilla said in comments reported by daily Peru.21.

The Agriculture Minister, Milton von Hesse, echoed the Finance minister’s opinion that the payment would “not break the bank” but that it would affect payment of other debts and the viability of the government’s social programs.  Von Hesse also said he regretted the Constitutional Court has not looked more closely into the effects of the payment.  During a separate interview, the minister said the Constitutional Court was to hand down general rulings and not “such detailed and specific” instructions on how the Executive is to execute the payment operation.

The Environment minister, Manuel Pulgar-Vidal, was the first cabinet member to publicly criticize the Court’s ruling, saying that it had no right to tell the government to “issue a decree within two months” on any issue.  “It has confused its role,” he said.

But now not only the government is seeking ways to defer the ruling. The current dean of the College of Engineers, Carlos Herrera, said this week there is no record in the minutes of the College that the members of the institution ever agreed to file a plea with the Constitutional Court for payment of the agrarian bonds.

According to Herrera, who was elected dean in January this year, the request from the College must have been signed by an individual as a third party request and was never put forward to the College members as a whole.  The plea was filed in 2011, when the dean was Rafael Riofrio.

Herrera said this week that the College must have been used by external interests, since the institution itself has no direct interest in agrarian bonds nor does it own any bonds.

The president of the Lima Bar Association, Raul Chanamé, said this misuse of the institution was “very grave.”

Added to this is the question of procedure within the Constitutional Court itself.  The judges were equally divided on the decision and, as president, Oscar Urviola cast the deciding vote.  Critics, however, say that Urviola should have recused himself from the case completely since before he was elected to the court he was a legal advisor to the Banco de Credito, which holds agrarian bonds for a total value of approximately $270 million.  In an editorial, La Republica daily called the procedure “illegal and immoral.

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