MercoPress. South Atlantic News Agency

Comparasion begin to weight heavy in Uruguay

Perhaps because of its size, tiny Uruguay spends an awful lot of its time being compared with other countries.
For its solid financial system and uneventful political scene Uruguay was long referred to as “the Switzerland of South America”. Equally hopeful, its finest beach resort, Punta del Este, has been described as the continent's own Saint-Tropez.

Wealthy Argentines, who traditionally flocked to its beaches and put their money in its banks, tended to think of Uruguay as a province of their own country - an appraisal to which Uruguayans react with horror. Today, however, Uruguay resembles nothing so much as its economically stricken neighbour across the River Plate.

Having lost more than 40 per cent of deposits from its banking system this year, Uruguay was forced to declare an unscheduled bank holiday on Tuesday for the first time in decades. Banks are due to reopen on Monday, but there will likely be some restrictions on withdrawals from public or troubled banks.

Even more shocking to Uruguayans, the normally placid streets of Montevideo, the capital, have been convulsed by scenes of rioting, as hundreds of poor and unemployed citizens ransacked shops and supermarkets. Yesterday, thousands of police and army troops patrolled the streets to prevent a repeat of the disturbances, which recalled the food riots in Argentina last December that eventually toppled the government.

"Once again we see the same scene, this time from the eastern side of the River Plate," said the Argentine newspaper Clarin.

It is a comparison that the government and most Uruguayans have been desperate to avoid. The government says the lootings have been politically organised, yet cannot pinpoint the alleged mastermind. And the economy minister has vowed to avoid the draconian restrictions on withdrawals imposed in Argentina last December after a bank run threatened to demolish its own banking system.

Comparison between the neighbours is also something the US and the International Monetary Fund would like to dissuade.

Both have taken a tough line with Argentina since its collapse in December, saying it only has itself to blame for its economic misfortunes. Cutting off aid for Argentina in December represented an important victory for those such as Paul O'Neill, the US treasury secretary, who oppose IMF bailouts and believe borrowers and creditors should bear the consequences of their decisions.

According to one person close to the US Treasury, there is a desire to stamp out any contagion from the Argentine crisis that "could be used by the proponents of bailouts" to criticise the tough line they have taken with Argentina.

Just before heading out to the region, Mr O'Neill made a fresh attempt to distinguish between the two closely linked nations. Uruguay, he said, "deserves the ongoing support of the international financial community for its commitment to sound economic policy". No such luck for Argentina.

The US and IMF approach to the developing regional crisis has been likened to one of "containment" - leaving the Argentines to sort out their "home grown" troubles while trying to halt their spread to its neighbours. But Uruguay's experience this year shows how this is not always possible.

International financial officials congratulated themselves on how little financial contagion there had been after Argentina's record debt default in December. Important lessons had, they said, been learnt since the last regional crisis, in Asia.

But the linkages between the regional economies and the deep, long-term effects on investor confidence had been underestimated.

Uruguay's economy, in its fourth year of recession because of Argentina, began to come under heavy strain this year. Crisis-wary Argentines began to pull out part of the $5bn they were estimated to have stashed in Uruguay and send it farther offshore. Uruguayans began to follow suit.

At the same time, investors began to worry that Uruguay might not be able to keep up payments on its debt, sending interest rates soaring and creating an almost self-fulfilling prophecy. Indeed, for those who have experienced Argentina's crisis over the past year, there are many more similarities about what is occurring today in Uruguay than there are differences.

"We've seen this film before," says Federico, an Argentine public relations executive. He has had the bad luck to have been affected not only by Argentina's bank freeze in December, but by Uruguay's this week. Any money he earns now is going under the mattres.