A Hedge Fund’s Peru Bond Fight Now Playing at a Theater Near You

  • Peru asked tribunal to dismiss Gramercy’s $1.6 billion claim
  • A movie portraying Peru’s dispute hit U.S. theaters last week

A spat between Peru and bondholders over decades-old unpaid debts is playing out in an unlikely place: your local movie theater.

“The Debt,” as the movie is titled, is a fictional account of ruthless Wall Street types who seek to enrich themselves at the expense of the nation’s poorest citizens. While the specifics are different, it has parallels with the real-life dispute between Peru and Gramercy Funds Management, a $6.1 billion hedge fund based in Greenwich, Connecticut.

Stephen Dorff, center, in "The Debt" portraying a hedge fund employee demanding payment from Peru’s finance ministry.

Source: Barney Elliot

In 2006, the firm began snapping up the defaulted bonds that were originally handed out to landowners when their farms were seized in the 1960s and 1970s. It’s now demanding that Peru pay up. Gramercy says Peru snubbed efforts to negotiate a settlement and left the firm with no choice but to sue, while the government contends the fund has mounted a smear campaign to profit from the developing country’s past misfortunes.

Just last week, Peru asked a tribunal to toss out a $1.6 billion claim over the notes held by Gramercy.

The movie, which started playing in New York and San Francisco theaters July 7, was conceived by director Barney Elliott, who moved to Lima in 2009. He started working on it after speaking to landowners who had given up hope the government would honor the debt and sold them to foreign investors like Gramercy at a deep discount. And he realized that these funds would one day take Peru to court over the debt, which bothered him.

“Here are companies coming from outside and involving themselves indirectly in a country’s deep cultural and emotional wound,” Elliott said.

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“The Debt” is a clear example of art imitating life, to an extent. In the movie, Peru is forced to cut back spending on its health service to pay a hedge fund called Union Global Capital. A nurse’s assistant turns to crime to pay for a surgery the hospital can’t afford, which serves to illustrate the human cost of the fund’s exploitation.

In reality, Peru’s finances are robust and nowhere close to being compromised should it ultimately lose the debt case. The nation -- the world’s third-biggest exporter of copper and zinc -- boasts foreign reserves of $60 billion.

The film features Stephen Dorff, who starred in Sofia Coppola’s “Somewhere,” as a hedge-fund employee sent to Peru and David Strathairn from the “Bourne” action-film series as his boss. Brooke Langton -- who played the character Samantha in the TV series Melrose Place -- also makes several appearances. Reviews have been mixed, with Canada’s Globe & Mail newspaper calling it “well-meaning but contrived.”

Gramercy said the movie doesn’t reflect the truth of its dispute with the government, and glosses over the fact that the majority of land-bond holders are local Peruvians who the hedge fund says are getting a raw deal.

“The reality of what has occurred today in Peru is much different,” Steve Bruce, a spokesman for the hedge fund, said in an e-mail.

In Peru’s July 6 filing, Peru rejected Gramercy’s claim that it violated the U.S.-Peru Free Trade Agreement by not paying the land bonds. Peru said its trade agreement with the U.S. wasn’t in force in 2006 and that Gramercy is claiming damages “grossly misaligned with any reasonable expectations.” It also said the fund opted not to participate in a process Peru set up to pay bondholders.

Pablo Secada, a former Finance Ministry official who saw the movie, said the government bears responsibility for dragging its feet in resolving the land-bond dispute. He expects President-elect Pedro Pablo Kuczynski to negotiate a settlement.

“It’s time to pay back the agrarian bond holders as well as the teachers, the nurses with wages in arrears -- everyone we owe,” said Secada, who’s now chief economist at the Peruvian Economy Institute.

Carlos Anderson, a spokesman for a APJ, an umbrella group of local bondholders, says the film wrongly suggests that Peru shouldn’t have to repay its debts. He said local bondholders, who hold 80 percent of the debt outstanding, welcomed Gramercy’s suit.

“Bondholders are happy that, at long last, there is someone defying the Peruvian government and at least bringing them to the table,” Anderson said. “If it had only been us, they would have continued doing what they’ve been doing for the last 40 years.”

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