During the 1860s, at the height of the guano boom, Peru's strong credit standing enabled it to borrow heavily. It contracted large loans throughout this decade and well into the early 1870s, but economic problems soon followed. Although the guano market weakened, Peru continued to spend wildly on the construction of railroads. By 1876, Peru, the largest debtor in Latin America, was in default.

In June 1876, Peruvian negotiators concluded the so-called “Raphael contract” giving the newly formed English Peruvian Guano Company a four-year monopoly on the guano trade in exchange for help in paying off the foreign debt. This contract reestablished the important linkage between Peru's foreign debt and its guano. The Raphael contract was typical of Peru's efforts to address its foreign debt obligations during the golden age of guano. As in the 1840s and 1850s, rather than implementing stringent domestic austerity programs to meet the demands of its creditors, Peru's government granted important concessions to foreign business concerns.

Unfortunately, for all concerned, the Raphael contract also coincided with the end of the guano boom. The result, soon thereafter, was the bust of the Peruvian Guano Company. Due to Peru's weakened economy and the falling value of its guano, the Company simply could not meet its obligations to either the Peruvian government or the creditors. Both the government and the bondholder committees clamored for compensation from the Company.