Wednesday, July 31st 2002 - 21:00 UTC

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Uruguayan banks closed; O'Neill apologizes to Brazil; Agriculture out again?; Brazil appeals to IMF

Uruguayan banks closed Uruguay's Central Bank closed all banking operations on Tuesday in an apparent attempt to stop the loss of deposits and reserves as a result of the worst financial crisis faced by the country in decades. In six months Uruguayan banks lost almost 5 billion of its 13 billion US dollars in deposits, and international reserves dropped to below 700 million US dollars following a contagion of the Argentine crisis. When the Argentine default and banking crisis exploded last December/January, the Uruguayan banking system, where half of the depositors are Argentines, was considered solid rock and with a strong backing from the International Monetary Fund. However it was soon made public that several of the main banks had been openly speculating in Argentina and were either caught in the "corralito" (freezing of deposits imposed in the Argentine banking system), or involved in dubious off-shore banking. This started an erosion on Uruguayan banks by Argentine depositors that was followed by Uruguayan residents when the scandal involving several banks, whose board members fled the country, was confirmed. Even when the IMF and World Bank came to the rescue of Uruguay promising over 3 billion US dollars aid (a world record considering the country's 18 billion US dollars GDP), depositors have continued to withdraw their money at an even increasing rate that jumped from 40 million US dollars per day to over 60 million US dollars during July. A new Finance Minister and Central Bank authorities with support from the whole political system were named last week but so far this seems to have been insufficient to calm fearful depositors, recalling the Argentine experience that is daily broadcasted in local television. Under these circumstances a Uruguayan delegation is now in Washington negotiating an advance of IMF funds and possibly a US Treasury bridge loan. Apparently to give time for the discussions in Washington to evolve and decide the closure of several of the banks involved in speculative operations, (and virtually broke), the whole system was shut down at least for one day. Even when Uruguay has a relatively responsible political system and its finances are in order, given the circumstances, its dependence on trade with Argentina and Brazil has also condemned the country to almost four years of recession, growing unemployment and labor unrest.

O'Neill apologizes to Brazil

US Treasury Secretary Paul O'Neill indirectly apologized to Brazilian authorities following his public remark that international financial rescue packages for Latin America countries usually end in Swiss secret accounts. In an interview with The Washington Post, Public Affairs Treasury Under Secretary Michele Davis said that Mr. O'Neill had no intention of making reference to corruption at Brazilian government level when he made his explosive remark about aid money fleeing to Switzerland. Ms. Michele Davis said that Mr. O'Neill wants to make it clear that regarding the fleeing of money to Swiss banks he was referring specifically to Argentina and Uruguay, that have recently been undergoing serious problems with their economies. "Brazil has given evidence that it's capable in making use of international aid efficiently", said Ms. Davis adding that the US Treasury supports the current talks the Brazilian government is holding with the International Monetary Fund". Last week Mr. O'Neill who is scheduled to visit Brazil, Argentina and Uruguay at the beginning of August indicated that it does not make sense to aid those countries with "because it all ends in Swiss banks". This is not the first time Mr. O'Neill comes out publicly with such strong statements, a few months after taking office he insisted that United States would not support IMF aid packages because it meant giving away money from American taxpayers "American plumbers and carpenters savings to spend drift governments". On hearing the remarks, Brazilian authorities informed the US Embassy in Brasilia that Mr. O'Neill "was not welcome". Actually Mr. O'Neill was scheduled to visit the area in the second half of July to "get the touch" of the local economies, but had to postpone the trip until early August following the collapse of the American stock markets because of the extended corporate fraud and subsequent confidence crisis among American investors.

Agriculture out again?

European Union's main trade negotiator with Mercosur, Karl Falkenberg, unveiled this week in Geneva the free market discussions timetable between the two blocks which leaves agriculture for the last phase, a proposition that most probably will be resisted by Mercosur. Mr. Falkenberg said that the EU wants to begin next July (2003) the final phase of discussions with Argentina, Brazil, Paraguay and Uruguay, but previously, in February 2003 the block must present the list of market access conditions for the different goods, compatible with World Trade Organization rules. The market access list will practically cover 80% of all bilateral trade, only leaving behind agriculture, a most contentious issue, and which Brazil and Argentina insist must be considered simultaneously. "If we keep to the timetable, we will be in the final phases of the negotiation towards the end of 2003, but it's better not to speak of a deadline, be it 2003 or 2004, what matters is to get the rounds of negotiations going", indicated Mr. Falkenberg.

Brazil appeals to IMF

After the local currency, the Real, collapsed to its lowest level and the country risk rocketed to a new record, the Brazilian government announced that an official mission will be travelling to Washington to hold talks with the International Monetary Fund, IMF. The mission entitled with negotiating powers will attempt a new support agreement with the IMF, that should extend the whole of 2003, in spite of the coming elections next October 6th. "All is open for discussion", said Brazilian Finance Minister Pedro Malan in direct reference to the essential indicators and targets of the Brazilian economy to be considered with the IMF. Prospects of an opposition victory in the coming presidential election has caused ongoing turbulences in financial markets and foreign investors are fearful Brazil will not be capable of honoring its staggering foreign debt, much of which in Reales but adjusted to the US currency, and now standing at over 270 billion US dollars, equivalent to half its GDP. Since opinion polls began showing Socialist candidate Mr. Inacio Lula da Silva leading, the US dollar shot past the threshold of 3,00 Reales and now stands at almost 3,30, while sovereign bonds crashed and the stock exchange lost much of last year's gain. However the fundamentals of the Brazilian economy remain strong with a healthy trade balance and a promising primary budget surplus of 3,75% of GDP. "Our objective is to arrive to an agreement as soon as possible", said Mr. Amaury Bier, Executive Secretary of the Finance Ministry and responsible for the negotiation. "We trust that the opposition candidates public commitment to honor contracts will enable us to show the IMF that there's sufficient ground for an understanding", stressed Mr. Bier. The prevalent opinion in Brazilian financial sources is that an agreement will be reached in the coming weeks but credits will not be forthcoming until the new administration formally abides the program. In a brief but cautious release the IMF praised the Brazilian government's decision and said it expects to hold "constructive discussions" with the Brazilian delegation.. Brazil's first election round is October 6th. and play offs, since at this stage no candidate is seen with a 50% victory, will take place October 27th. President Fernando Cardoso's successor takes office January 1st. 2003.

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