Peru Debt Risk Rises on Castilla Speculation, Barclays Says

The risk of investing in Peruvian debt is rising as investors weigh the possibility that Finance Minister Miguel Castilla will resign from office, Barclays Plc said.

The cost to protect Peruvian bonds against non-payment for five years using credit default swaps rose by seven basis points, or 0.07 percentage point, to 143 basis points at 2:39 p.m. in Lima, according to data compiled by Bloomberg.

Investors are concerned that President Ollanta Humala would shift economic policy should Castilla leave, Alejandro Grisanti, an economist at Barclays Plc, said by phone from New York today. Castilla’s appointment in July 2011 helped convince many investors that Humala, a former army rebel, wouldn’t increase state interference in the economy. The Finance Ministry’s press office didn’t immediately respond to an e-mail from Bloomberg seeking comment about the finance minister’s plans.

Castilla, an economist educated at Johns Hopkins University in Baltimore and Harvard University in Cambridge, Massachusetts, was deputy finance minister under Humala’s predecessor Alan Garcia.

In an April 28 interview with state news agency Andina, Castilla denied he had resigned after Lima-based Expreso newspaper said he quit in protest over Humala’s plans to bid for local assets of Repsol SA. Humala told reporters May 24 he had no plans to change cabinet members.

Speculation over his possible resignation has mounted on a possible conflict with Humala over fiscal austerity, Grisanti said. While Castilla’s replacement probably would maintain existing macroeconomic policies, any change in the post may cause unease among investors, he said.

‘Base Scenario’

“Our base scenario is that Humala remains on the path he’s on now that allowed him to win the presidency,” Grisanti said. “Rumors he’ll abandon this path appear to come from groups seeking to damage his popularity. Sometimes the rumor causes concern among investors and leads them to sell.”

Barclays recommends investors buy five-year credit default swaps for Peru and sell protection for Mexico and/or Colombia. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

Peru this year will post the fastest economic growth among major South American countries, according to analysts polled by Bloomberg.

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