US embassy cable - 05LIMA3687

UNCLAS LIMA 003687 
 
SIPDIS 
 
DEPT FOR E, EB/IFD/OMA WHA/FO, WHA/AND, WHA/EPSC 
TREASURY FOR OASIA/INL, DO/IDD 
COMMERCE FOR 4331/MAC/WH/MCAMERON 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, PE, ENIV 
SUBJECT: PERU BUYS BACK $1.5 BILLION IN PARIS CLUB DEBT 
 
REF: PARIS 4901 
 
1.  (U) Summary.  The Peruvian Government on August 16 
issued a $1.5 billion buyback of its Paris Club debt, 
sending checks to 13 Paris Club countries.  The GOP expects 
the buyback to lighten the government's service burden over 
the next few years by an average of $360 million annually 
during the 2006-2009 period.  Standard and Poor's issued a 
statement on August 17, signaling a strong possibility that 
it will issue Peru an improved credit rating, based on the 
perception of stable macroeconomic policies.  End Summary. 
 
Paris Club Prepayment 
--------------------- 
 
2.  (U) On August 16, the GOP issued checks totaling $1.5 
billion to thirteen members of the Paris Club, including 
Austria, Belgium, Canada, Finland, France, Germany, Italy, 
Japan, the Netherlands, and the United Kingdom, in an effort 
to decrease Peru's foreign debt.  Peru owes more than $4.2 
billion to fourteen of the nineteen Paris Club countries. 
The buyback deal reduces Peru's service payments by more 
than $100 million for 2005 and by an average of $360 million 
annually from 2006-2009.  The GOP had originally planned to 
prepay $1.8 billion, but due to Euro depreciation against 
the dollar, the overall value fell to $1.5 billion. 
 
3.  (SBU) Based on Peru's strong macroeconomic performance, 
the GOP was able to take advantage of historically low 
financing costs at less than 6.4 percent.  Prepayment 
enabled the GOP to avoid high refinancing charges on more 
expensive loans, driving down costs in the long term.  In 
choosing which loans to prepay, the GOP focused on the most 
onerous debt due between 2005 and 2009, which included loans 
from 13 out of the 14 creditor countries (but not the United 
States). 
 
4.  (SBU) With this payment, Peru, along with Poland and 
Russia, is one of the first countries to successfully 
establish a mechanism to buyback its Paris Club debt.  Peru, 
however, is the only country to achieve this without 
investment grade status.  Despite the buyback, the GOP 
expects that it will meet its one percent GDP-fiscal debt 
target due to higher than expected tax revenue growth. 
 
Higher Credit Rating 
-------------------- 
 
5.  (U) After the Paris Club buyback, Standard and Poor's 
issued a statement, signaling that there is a strong 
possibility that Peru will be given an improved credit 
rating, based on the perception of stable macroeconomic 
policies.  Peru's investment-grade credit rating improved 
from BB- to BB in 2004.  According to JP Morgan, Peru's 
credit risk dropped from 1.58 to 1.50 percentage points in 
August. 
 
Comment 
------- 
 
6.  (SBU) The Paris Club prepayment is an example of how the 
GOP consistently maintains its solid macroeconomic 
performance despite political instability, such as the 
recent Cabinet changes.  The new Minister of Finance, 
Fernando Zavala, has indicated that he will continue many of 
Pedro Pablo Kuczynski's (PPK) economic policies, including 
issuing a bond sale in early 2006 to finance future Paris 
Club buybacks.  One of PPK's primary objectives, which he 
still maintains as Prime Minister, is to ensure that Peru 
reaches investment grade status by 2006.  Visiting rating 
agencies tell us that reaching investment grade will depend 
largely on Peru's ability to sustain its economic growth. 
Rating agencies will be watching closely Peru's structural 
reforms and efforts to further lower its debt ratios. 
 
STRUBLE