Peruvian President Alan Garcia announced today that the government will nationalize the nation's banks, a surprise move that strikes a severe blow at the interests of Peru's largest business groups.
Although Garcia did not give details of the expropriation, which must be sanctioned by Congress, a source close to the presidency said it will not affect seven foreign bank branches operating in Peru because they are conduits for risk capital that the government is trying to attract from abroad.
However, the action will have a sharp impact on many Peruvian business, which have strengthened thier investments in manufacturing, commerce and mining by maintaining a strong presence in the private banking system.
Garcia's surprise action was seen as an effort to regain the political initiative with a dramatic step to rally his supporters as he enters his third year in office.
It also was an overture to the Marxist United Left coalition, the largest opposition group, which has long proposed a nationalization of the financial system.
The move signals a radical shift in the government's domestic economic policy, which had been based on seeking new commitments from Peruvian investors to boost economic growth. That strategy started to run out of steam in the past four months as the most conservative businessmen demanded more concessions.
The new approach indicates the government will take a more hostile line toward private investors. A government economic spokens did not rule out the possibility of further expropriations if there is resistance from the business community.
Garcia justificed the measure as necessary to "democratize banking credit." The government already holds three commercial banks, three finance firms, five smaller banks, the country's largest insurance company and a system of development banks.
Garcia also announed stricter controls on foreign exchange operations, closing all exchange brokers and prohibiting any transaction in foreign currency outside the banking system, in an effort to block further rises in the street price of the U.S. dollar and to prevent the flight of capital.
The expropriation caught the business community and the public by surprise. Over the weekend, the government ordered a three-day banking holiday starting Monday, but that was thought to be a precautionary measure against foreign exchange spectulation on the eve of Garcia's speech.
According to presidential sources, the bank takeover by decided by Garcia two weeks ago and was secretly planned by an inner circle of officials.
The plan was unanimously approved by the Cabinet after an 11-hour debate, though two or three minsters had seriosu reservations, the sources said.
The measures was also presented to leaders of GArcia's party, the American Popular Revolutionary Alliance (APRA), and the Peruvian armed forces, which apparently gave their support.
Garcia also announced that the state of emergency in the city of Aayacucho would be lifted soon and that the curfew that had prevailed in Lima since February 1986 would be lifted immediately.
Also announed was a renewed effort to pass more public services to the control of local governments.