Uruguay: A Well-Executed Model for Debt Workouts

To foreign bondholders still licking their wounds from Argentina's massive 2001 default, the situation in neighboring Uruguay last year had all the earmarks of another disaster. Even though this tiny nation of 3.4 million boasted a solid reputation for repaying its debts, the crisis next door sparked a run on Uruguay's currency and on bank deposits that drained 80% of foreign reserves. Things unraveled so fast that Uruguayans didn't even have time to lament the loss in February, 2002, of the country's coveted investment grade status. By July, protesters filled the streets of Montevideo, demanding President Jorge Batlle's resignation. Clearly, Uruguay was in no position to meet payments coming due on its $10 billion in foreign debts.

But an unusual thing happened on the way to Uruguay's meltdown. Instead of the acrimonious, chaotic confrontation foreign bondholders had come to expect in crisis-ridden emerging markets, Uruguay sucked in its pride and told foreign creditors it needed help. It first secured a $1.5 billion lifeline in mid-2002 from the U.S. Treasury as a stop-gap measure until a new accord could be worked out with the International Monetary Fund. With that in hand, President Batlle and Uruguay's investment banker, Salomon Smith Barney, were able to convince holders of 19 different bond issues denominated in five currencies to accept new terms. "Uruguay shows how the crisis-prevention process should work," says Citigroup Senior Vice-Chairman William Rhodes, a veteran of numerous Latin debt workouts.