Credit: World Bank - Photo: 2015

U.S. Hedge Fund Threatens Use of Free Trade Accord to Sue Peru

By INPS* | IDN-InDepthNews Analysis

Washington DC (IDN) – An emerging-markets focused U.S. hedge fund that bought Peru’s 5.1 billion dollar decades-old military debts is threatening to sue the country.

Gramercy argues that the Peruvian government’s current repayment plan is inadequate and that if payments do not increase, it will sue Peru through a tribunal system embedded in the United States-Peru Free Trade Agreement (PTPA) that entered into force on February 1, 2009.

The PTPA eliminates tariffs and removes barriers to U.S. services, provides a secure, predictable legal framework for investors, and strengthens protection for intellectual property, workers, and the environment, says the Office of the United States Trade Representative.

It adds: The PTPA is the first agreement in force that incorporates groundbreaking provisions concerning the protection of the environment and labor rights that were included as part of the Bipartisan Agreement on Trade Policy developed by Congressional leaders on May 10, 2007.

Gramercy issued the threat to sue Peru as the three-day World Bank/IMF Annual Meetings began in Lima on October 9.

“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,” he said.

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.

Peru’s highest court ruled in 2013 that the government must honour 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.”

According to the Office of the U.S. Trade Representative, since the signing of the agreement in 2009, total trade almost doubled between the United States and Peru, from close to 9 billion dollars to more than 16 billion dollars in 2013.

PTPA established a secure, predictable legal framework for U.S. investors operating in Peru. “All forms of investment are protected under the Agreement. U.S. investors will enjoy in almost all circumstances the right to establish, acquire and operate investments in Peru on an equal footing with local investors,” says the agreement.

Overview of economy

According to a World Bank report, over the past decade, Peru has been one of the region’s fastest-growing economies. Between 2005 and 2014, the average growth rate was 6.1 percent in a context of low inflation (2.9 percent, on average). A favorable external environment, prudent macroeconomic policies and structural reforms in different areas combined to create a scenario of high growth and low inflation.

But the country has now entered a more challenging period since growth slowed in 2014 as a result of adverse external conditions, a corresponding decline in domestic confidence and fewer investments, says the World Bank.

In 2015, the World Bank expects growth in Peru to be similar to that of 2014. “The country should progressively recover to an average rate of 4 percent in 2016-2017. Large mining projects are expected to begin in the next two or three years. Additionally, the country will implement a countercyclical fiscal policy to support aggregate demand and the ongoing application of structural reforms will assure the continued confidence of private investors.”

Looking ahead, says a new World Bank report, major challenges for Peru this year and in the next two yeas will include achieving stronger, more sustainable economic growth and further strengthening linkages between growth and equity. “To achieve sustainable, balanced growth, Peru should develop public policies that accelerate decentralized growth, with an emphasis on its mid-sized cities,” advises the Bank.

It adds: To ensure economic growth with equity, the focus should be on the segment of the Peruvian population that continues to be vulnerable to economic shocks and that could fall back into poverty, which would reverse the progress made over the past decade.

The Bank welcomes the fact that the Government of Peru has identified priority areas to prevent the “fall back into poverty”. These include closing infrastructure gaps, increasing the quality of basic services such as education and health, and expanding access to markets for the poor and vulnerable segments of the population.

“The government’s current program aims to expand access to basic services, employment and social security; reduce extreme poverty; prevent social conflicts; improve the surveillance of potential environmental damage; and reconnect with rural Peru through an extensive inclusion agenda,” notes the Bank with apparent approval.

Knowledgeable sources warn that “fall back into poverty” cannot be ruled out of the Peru is forced to increase current repayment plan to the U.S. hedge fund Gramercy.

*INPS is an acronym for the International Press Syndicate that monitors diverse news and information sources around the world, enabling IDN offer news features and analyses on topics that impact the world and its peoples.  [IDN-InDepthNews – 09 October 2015]

Photo Credit: World Bank

2015 IDN-InDepthNews | Analysis That Matters

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