Uruguay Loan Makes Sense

The Bush administration’s grant of up to $1.5 billion in short-term bridge financing to Uruguay’s central bank was both bold and unexpected. The same folks at the Treasury Department who had so vehemently argued in other cases that such assistance was a waste of taxpayer money should be commended for putting together a financial package this week that will help banks in Uruguay sort out their crisis without wasting taxpayer funds.

The bridge loan is to be repaid in a matter of days, perhaps starting today, as Uruguay starts receiving the first installments of $3.8 billion in long-term loans from the World Bank, the International Monetary Fund and the Inter-American Development Bank.

Why rescue Uruguay and not gravely ill Argentina or financially and politically unstable Brazil?

Well, there is a logic to it. Sandwiched between the two largest countries of the region, tiny Uruguay with its 3.4 million inhabitants has long been one of Latin America’s most stable and orthodox economies. The solid credit ratings granted by agencies like Standard & Poor’s have made it attractive to foreign capital.

The problems Uruguay is facing are mostly due to external pressures. Without the brief loan, Uruguayan banks could run out of money as cash-strapped Argentines, their own bank withdrawals severely limited, cross the Rio de la Plata to withdraw their money from banks in Montevideo, Uruguay. Instability in the Brazilian financial markets and the devaluation of the Brazilian real have also taken a toll on Uruguayan banks.

The U.S. financing package came after Uruguay’s Congress approved legislation to strengthen banking regulations, which means some weak banks have already gone under.

On Monday, when banks in Uruguay opened after a four-day hiatus, there were no signs of panic. Yet the smooth reactivation of banking operations does not mean the path ahead for Uruguay will be easy. Solving the current banking crisis won’t restart economic growth in the country or the region.

What may help the region in the long term is the trade promotion bill, signed by President Bush on Tuesday, that will make it easier to negotiate free-trade agreements. A long-discussed free-trade pact with Chile may actually happen, bringing renewed hopes for expanding the North American Free Trade Agreement to South America.

The Bush administration has delivered its share of gaffes in Latin America, including a zinger this week by Treasury Secretary Paul H. O’Neill about government corruption. But the White House deserves praise for turning its focus to the region, starting with a limited loan that is safe for taxpayers.