Uruguay: A Bright Latin Beacon Is Snuffed Out

Uruguay has been called the Switzerland of Latin America: a stronghold of financial stability in an often chaotic region. Today, however, it is a case study in contagion--the victim of its reckless neighbor across the Rio de la Plata, Argentina.

The warm waters of Uruguay's beaches and its generous tax and banking secrecy laws have long been a magnet for rich Argentines in times of crisis. Foreign investors were attracted to the country's investment-grade status--the only Latin country besides Mexico to enjoy that rank. So Uruguayan assets became an anchor for many Latin American portfolios.

But the impressive track record came to an end in January, when Argentina devalued and defaulted. That country's strict capital controls forced Argentines to dip into their Uruguayan savings, reducing those deposits by 80% since then. In June, Uruguay floated its peso, which promptly fell by 45%. Panicky investors pushed the country's banks to the brink of collapse, and bouts of looting occurred. After the bank run, the central bank on June 29 ordered a four-day bank holiday, its first in 70 years. And the congress swiftly passed legislation exchanging $2.2 billion in fixed-term dollar deposits for government bonds.

Responding to the government's proactive stance, the U.S. made Uruguay a direct loan of $1.5 billion as a bridge until the International Monetary Fund approves its own aid package. Although IMF aid should stem the deposit outflow, nobody can guarantee for how long, and the country's benchmark bonds still trade at default levels.

Although international banks have small exposure in Uruguay--$7.7 billion in March, 2002, vs. $50 billion in Argentina--the country's rapid demise portends a grim future for the region. The two bright spots left in Latin America, Chile and Mexico, are still little affected by the crisis in the Southern Cone. But the near-collapse of one stalwart economy shows that no nation is safe from the turmoil.

By James C. Cooper & Kathleen Madigan

By Joshua Goodman in Buenos Aires

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