Nervous Uruguayans formed queues at cash machines for the second day running on Wednesday as their government announced the country’s banks will be closed for the rest of the week.
Rocked by the financial crisis in Argentina and Brazil, the tiny South American economy was forced to shut down its financial system on Tuesday to halt a run on the banks.
Nearly $6-billion has been withdrawn from Uruguay’s banks since the start of the year, 40% of total deposits, forcing the central bank to suspend operations at two banks whose reserves had fallen dangerously low.
The government’s own foreign reserves have shrunk by three quarters to $725-million since December. Ratings agency Fitch cut its sovereign rating for Uruguay one notch earlier in the week, saying its reserves were at ”precarious” levels.
Alejandro Atchugarry, who took over as Economy Minister last week after the resignation of his predecessor, said the government had no plans to follow Argentina’s example and impose an indefinite freeze on bank accounts. He expressed confidence in Uruguay’s ability to surmount a four-year-old recession and stabilise the financial system.
While Argentina is in the seventh month of negotiations with the International Monetary Fund (IMF) over a loan to prop up its economy, Atchugarry said Uruguayans could take hope from ”positive signals” that the United States would back a bailout.
”Uruguay has been a strong performer in Latin America and deserves the ongoing support of the international financial community for its commitment to sound economic policy,” the US Treasury said.
Uruguay’s problems have dashed hopes in Washington that Argentina would prove to be an isolated case of economic collapse. With Brazil, South America’s largest economy also rocked by falling markets and a plummeting currency, pressure is now mounting on the US Treasury to reverse its opposition to large-scale financial bailouts. Uruguayan officials are in Washington negotiating with the IMF and local reports have suggested that $1,5-billion could be released to Uruguay by international lenders in coming days.
Uruguay’s reputation for stability in a region prone to financial crises has earned it the nickname the ”Switzerland of South America”, but the country is now paying the price. Argentines who used the country as a haven have been forced to draw on their Uruguayan savings as their own country’s saving freeze extends into its ninth month.
The Uruguayan peso lost nearly a quarter of its value, falling as low as 35 to the US dollar after the announcement of the bank holiday, but recovered to trade at 28 on Wednesday. Since it was freely floated in the middle of June it has halved in value.
All the leading economies of South America have suffered a loss of investor confidence in recent months, forcing them to turn to the IMF and other multilateral lenders for assistance.
The ongoing crisis in Argentina has unnerved the markets, while the rise of the left-wing candidate in Brazil’s forthcoming presidential elections has sparked fears that the region’s leading economy may be about to abandon its commitment to market-orientated policies. — (c) Guardian Newspapers