A US hedge fund took legal action Thursday to force the government of Peru to pay off $1.6 billion worth of defaulted bonds issued by the country's former military regime.

In a case echoing Argentina's battle with US hedge funds over its defaulted bonds, Connecticut-based Gramercy Funds Management said the government had refused to negotiate with it over the debt it bought at a steep discount 10 years ago, hoping to win full repayment.

Gramercy said Lima had "selectively" defaulted on the local-currency "land bonds" started in 1969 and continued in the 1970s to compensate owners of expropriated land, while it makes payments on other debt.

It said that the government of President Ollanta Humala had interfered with Peruvian court decisions that supported repayment of the bonds revalued to account for years of hyper-inflation.

Gramercy also claims the support of Peruvian holders of the defaulted bonds also demanding payment on a court-designed scale accounting for inflation.

Gramercy issued a notice of arbitration with a claim for the full value of the bonds, adjusted for inflation, under rules of the UN Trade Commission on International Trade Law and the US-Peru bilateral trade agreement.

"Peru's stonewalling and steadfast refusal to have any substantive discussions has left Gramercy no choice but to commence and vigorously pursue this arbitration and enforce its rights," said Gramercy chief investment officer Robert Koenigsberger in a statement.

Gramercy, a specialist in investing in emerging-market assets, is seeking arbitration in New York. 

But last October, when Gramercy first said it might seek arbitration, Peruvian Finance Minister Alonso Segura said his country would oppose any legal action outside its territory.

The move comes at the end of Humala's tenure as president. Peruvians go to the polls this Sunday in the second round of the presidential election.

On Thursday, Peru's Finance Ministry said in a statement that Gramercy's move is "the latest attempt to discredit Peru after similar attempts in the past."

It said the issue is proceeding through Peru's courts and the latest action "seems to be designed only to call attention to Gramercy's own interests at the current time."

"Our country will firmly defend its position against Gramercy's claims under the law," it added.

The case comes just months after Argentina gave up a 15-year fight in New York courts against hedge funds which had scooped up its defaulted dollar-denominated debt at huge discounts to face value.

Even though Argentina had reached a restructuring deal in which nearly all of its creditors agreed to write off much of the debt, the hedge funds, which Buenos Aires labeled "vultures," sued for full repayment and won.

The Argentina case raised questions about the ability of such bond investors to undermine international efforts to help financially weak governments restructure their debts.

Source: AFP