PERU BUYS BACK $1.5 BILLION IN PARIS CLUB DEBT

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