Peru says prepaying Paris Club debt saves money

By Reshmi Basu

New York, July 15 -The Republic of Peru said it will realize real long-term savings from its plan to prepay Paris Club debt.

Peru has agreed to prepay $2 billion of Paris Club debt due between August 2005 and December 2009. The payments are scheduled for Aug. 15.

Over the next 4½ years, Peru will save $350 million in Paris Club debt amortizations. Additionally, Peru expects its international financing needs to decrease by a similar amount, according to a filing with the Securities and Exchange Commission.

Moving ahead, the country's debt will have longer maturities. The country will be replacing its debt maturing in the next 4.5 years with debt maturing in the next 12 to 20 years, extending the average maturity.

Another benefit from the repayment will be increased financial flexibility and reduced refinancing risk by replacing debt currently held by Paris Club creditors.

Also, the prepayment is expected to reduce foreign exchange exposure, since Peru will use debt denominated in its currency to refinance part of the outstanding debt. Peru also sold $750 million of dollar-denominated bonds on July 13 for the refinancing.

Following the prepayment, the Paris Club debt that amortizes on or after January 1, 2010 will be $4.395 billion.

Including the Paris Club debt, Peru estimated it will need to raise $800 million from the international capital markets to fund its 2006 budget commitments.

The prepayment may cancel any need to raise financing in the external capital markets for 2006.

The country has already raised $135 million this year, with the original intention of paying off Paris Club debt payments due this year.

If the anticipated Paris Club debt prepayment takes place, the $135 million will therefore constitute excess funding for Peru's 2005 debt commitments.

The excess funds will then be used pre-finance its 2006 funding requirements.

Peru expects that the anticipated Paris Club debt prepayment will lower Peru's payment requirements under the Paris Club debt in 2006 by approximately $350 million, cutting the country's external financing requirement for 2006 by a corresponding amount.

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