(Adds comments related to Conga project)
* Land bonds a bitter chapter in Peruvian history
* Outstanding bonds worth $1 billion to $3 billion; swap proposed
* Merino says more to Peru's economy than Conga project
By Terry Wade
LIMA, March 13 (Reuters) - Beatriz Merino, arguably the most respected public figure in Peru, is taking on a new role as the advocate for holders of the country's infamous land bonds who want the government to finally pay billions of dollars in old debts.
Merino, a lawyer by training and Peru's first woman prime minister, told Reuters in an interview on Tuesday that the time has come for the executive branch to end a 40-year-old controversy and take care of a liability estimated at $1 billion to $3 billion, or nearly 2 percent of gross domestic product, by paying off the bonds issued to people whose land was seized for redistribution.
She has considerable political weight and is a rarity in the Andean country because she is well-regarded by both the left and the right in a polarized country. Widely seen as both capable and incorruptible, she was sounded out to lead President Ollanta Humala's cabinet before he took office in July.
Merino - a former member of Congress who has headed the country's tax agency, association of pension funds and its ombudsman's office - said previous governments have created a "constitutional infraction" by disregarding a 2001 ruling from the Constitutional Tribunal that told the executive branch to pay the land bonds. Peru's judiciary has said the bonds are in default.
Congress did the same last year. Each of the last four presidents tried periodically to address the issue but balked at paying up.
"I don't think any state can be in a position to ask its citizens to uphold the law if it itself doesn't uphold the law," she said. "No state can ask people to respect court decisions if it itself doesn't do so."
Peru's ombudsman's office, which is tasked with making sure the state respects human rights, has also urged governments to pay the land bonds since the early 2000s. That was before Merino, who has at times been talked about as a potential presidential candidate, took charge of the agency.
"This shouldn't go on any longer and it can't go on any longer," Merino said.
“Peru today has a respected economy and aspires to be a first-world country. With that comes responsibilities. And one of those responsibilities is to honor its debts.”
In what became one of the most bitter chapters in Peruvian history, the agricultural bonds were issued in the 1970s during a chaotic land redistribution program started by leftist dictator Gen. Juan Velasco, who sought to take farms from the rich and hand them over to peasants.
Many middle-class planters were also ensnared in the program, which caused Peru's agricultural output to collapse as 5,000 farms were seized between 1969 and 1981.
Agricultural output plummeted following the redistribution, which took farms from aristocrats and middle-class planters alike and handed them over to workers and the poor.
Hundreds of court cases have been filed over the years to demand payment and a small number of them have been ruled in favor of bondholders who sued the agriculture ministry. Other cases could be tied up in courts for years.
But the vast majority of bondholders have never bothered to file claims. Some have sold their bonds at deep discounts in an informal secondary market. Internet sites in Peru post advertisements to sell the bonds.
Creditors include groups representing thousands of families who lost their farms, Peru's biggest bank, Banco de Credito del Peru (CRE.LM), and the investment fund Gramercy.
Although Peru has won investment-grade credit ratings over the last couple of years as its economy has boomed, it is still haunted by four fiscal skeletons: the land bonds, a retirement fund for the military, a similar fund for fisherman and a government-run housing program that went bust. That housing fund, known as Fonavi, is in the process of being paid.
Merino said that if Humala - who has named market-friendly technocrats to key economic policy posts - were to pay the bonds, it could calm investors worried about the strength of Peru's institutions. [ID:nRISKPE]
"I believe they could send a national and international signal that compliance with the mandates of the courts is a moral, legal and constitutional aim of this government," she said.
To avert pressure on the budget, creditors say the government should carry out a swap that would allow owners of the land bonds to exchange their illiquid paper for new sovereign bonds with long-dated maturities. A swap would marginally add to the country's debt burden.
Creditors say the country's tax agency is best equipped to carry out the swap and verify the authenticity of old bonds people own.
Some creditors have proposed donating 10 percent of the payments to a foundation that would give out college scholarships to poor kids and finance development projects in rural Peru.
Asked whether he would pay the land bonds, Finance Minister Luis Miguel Castilla said in February: "I don't think this is at the top of the agenda at this moment but Peru must honor all of its liabilities."
Merino said paying the land bonds might provide a counterpoint to concerns over a giant project in the country called Conga.
The country's business community has grown worried that community opposition to mining could sink U.S.-based Newmont Mining's (NEM.N) $4.8 billion Conga gold project.
"I think the country has developed a Conga-centric personality in the last few weeks, as if everything were linked to a single project, and that isn't so. Dozens of projects advance with stability, harmony and success."
Conga is the biggest project ever proposed in Peruvian mining history.
"I don't think it sends a good international message to say the fate of a country depends only on a single issue (like Conga)," she said.
(Editing by Gary Hill and Muralikumar Anantharaman)
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