33 Institutions Affected : Peru to Nationalize Banks Despite Opposition

LIMA, Peru —  The Peruvian government issued a law to nationalize private banks on Sunday, ending 10 weeks of heated debate that has dominated political life and galvanized right-wing opposition to President Alan Garcia.

The law, published in the official gazette, was signed by Garcia on Friday and comes into force today.

Declaring banking activities to be of social interest, it says the government will take over all the shares of domestic commercial banks, selling 30% back to the public but restricting the holdings of any one family to about $15,000 worth of stock.

The legislation affects 10 private banks and 23 finance and insurance houses. It says compensation will be based on the Superintendency of Banks’ last audit, taking into account profit and losses since then.

Bankers have said they will challenge the legality of the measure and its implementation at every stage, and business leaders say it has created a major loss of investment confidence.

The law prohibits foreign banks from setting up new offices in Peru but excludes the seven existing foreign banks, a move that has been branded unconstitutional because it discriminates against local private banks.

Opposition to the law was led by Peru’s leading novelist, Mario Vargas Llosa, who said it represented a grave threat to democracy in a country ruled by the military for 12 years until 1980.

Garcia, who is thought to have postponed signing the law for some days to avoid protests during Saturday’s overnight visit by French President Francois Mitterrand, argued that the measure was essential to “democratize credit”.

Garcia has argued that the private banking system in Peru is dominated by a handful of rich families who channel credit to their associates, reducing the amount available to small businesses.

The measure authorizes the creation of regional banks, with at least 30% state participation, in line with Garcia’s aim to stimulate economic growth in the interior, where a guerrilla war, feeding on poverty, is one of Peru’s most serious problems.

The government has authority under the law to appoint teams of administrators to take control of the banks while details of the new structure are worked out.

The legislation allows bankers to appeal to the Supreme Court, and it was not immediately clear whether the government would move its administrators in before such appeals were made.

Garcia sent officials into the banks after announcing his planned nationalization July 28, only to withdraw them days later when a judge ruled the action illegal.