U.S. Lends $1.5 Billion to Uruguay

The Bush administration made an emergency $1.5-billion loan to Uruguay on Sunday in a bid to halt the country’s banking crisis and limit the possibility of another Argentina-style economic collapse.

The loan was described as a “bridge” or short-term loan until the International Monetary Fund and other multinational lenders can act on Uruguay’s behalf later this week.

Considered until recent months to be so stable and secure that it was described as the “Switzerland of South America,” Uruguay experienced an outbreak of social unrest last week after the government closed all banks Tuesday to stop a run on the banking system.

Banks have remained shut since. The U.S. loan is intended to make it possible to reopen banks today.

The action appeared to mark a departure for the administration, which has generally opposed bailouts. But failure to act might have led to financial problems elsewhere in Latin America, where Argentina and Brazil are already facing trouble.

Although Uruguay has just 3.3 million people, it acts as a banking center for many South American nations, especially Argentina, whose citizens have come to rely on Uruguayan bank deposits as their own country’s banking system remains tightly restricted in the aftermath of a January devaluation and a partial banking freeze that began in December.

A steady withdrawal of funds from Uruguay this year by cash- hungry Argentines has accelerated in recent weeks as rumors swirled that Uruguay would follow Argentina’s example and impose a freeze of its own. The bank holiday imposed Tuesday was the realization of those fears.

Foreign reserves have dwindled to $655 million from $3 billion a year ago. Violence erupted last week as depositors vented their outrage at being unable to access their funds.

In confirming the loan late Sunday, the Treasury Department praised Uruguayan President Jorge Batlle for “courageous commitments to ensure that Uruguay remains a strong financial center.”

“We are confident that this enhanced program will help Uruguay address the intense external pressures it has faced in recent months,” Treasury Secretary Paul H. O’Neill said in a statement. He arrived in Brazil on Sunday and will visit Uruguay and Argentina later in the week.

The U.S. acted after Uruguay’s Congress approved emergency legislation that blocked access to long-term deposits, similar to certificates of deposit, for three years in exchange for higher rates of interest. Checking and savings accounts will not be affected.

Analysts noted parallels between the action on behalf of Uruguay and policies of the Clinton administration.

“The Bush administration has been critical of President Clinton’s willingness to respond to the Mexican and Southeast Asian crises, saying that too much money had been used to bail out countries suffering because of bad policy or because foreign investors had made bad decisions,” UCLA economics professor Sebastian Edwards said. “The key question is whether this [loan] signals a change in U.S. attitude with respect to currency crises and whether the U.S. will be willing to give other large aid packages to countries in financial difficulties.”

Other than a $10-billion assistance package to Turkey in April 2001, the Uruguay loan is the only sizable financial bailout President Bush has made since taking office.

But Uruguay poses a danger of financial contagion in Latin America. Argentina, mired in a a four-year recession, continues to plead for a bailout from the IMF and World Bank. Brazil may soon need assistance because of debt and a weakening currency.