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Montevideo, March 29th 2024 - 05:47 UTC

 

 

Uruguayan officials with different visions how to address risk of “asset bubbles”

Thursday, November 11th 2010 - 01:09 UTC
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Economy minister Fernando Lorenzo Economy minister Fernando Lorenzo

As in most of the rest of the world, conflicting visions of the latest global monetary events and its impact on emerging economies have surfaced among Uruguay’s top officials responsible for the running of the economy and finances.

Economy minister Fernando Lorenzo said Uruguay is well prepared to confront the challenge of a strong appreciation of the Uruguayan peso or the formation of “speculative bubbles” and denied any plans to tax capital inflows, as neighbouring Brazil has done.

But a member from the board of the main development bank, Banco Republica, Jorge Perazzo said there is growing concern about “asset bubbles” given the massive inflow of capital into Uruguay and did not discard following some of Brazil’s steps, without specifically mentioning any.

Central Bank president Mario Bergara said that the current world scenario of zero interest rates in developed countries and inflows of capital to emerging economies looking for higher returns is “not compatible in the long term” and therefore Uruguay has a delicate balance: accumulate international reserves on the one hand and on the other try to contain the appreciation of the local currency.

Furthermore Uruguayan economist Enrique Iglesias said that banking supervision and strict financial regulation are crucial in the current situation.

“In this turbulent world we must avoid bubbles and this is the responsibility of regulators and supervisors: to ensure that currency mismatches such as those that precipitated the banking crisis of the nineties are not repeated”, said Iglesias.

All comments were made during the current annual assembly of the Latinamerican Banks Federation, Feleban, hosted by Uruguay in Punta del Este and which among other issues is discussing the impact of developed countries stimuli programs in emerging economies and the “currencies” war that has followed as countries try to ensure markets for their exports.

“These events are out of our control, pressing on all countries of the region, but Uruguay has performed well and we will continue on that line without having to implement levies on incoming capitals”, said Lorenzo.

“The latest decision from the Fed (to inject 75 billion US dollars per month to the US economy) will lead to a flush of dollars and a revaluation of currencies. This will have a most negative effect on Uruguayan exports and in generating speculative asset bubbles”, said Perazzo from the Banco Republica.

“This is particularly serious for the real estate market where a significant percentage of the capital inflow goes, possibly generating inflated prices, a speculative bubble and we must be very careful with bank credits for that sector”, underlined Perazzo.

“We must let the Uruguayan peso appreciate ‘a little’ and accumulate international reserves so that financial operations with strict regulation do not overheat the economy or create asset-price bubbles”, said Bergara.

“It’s better to accumulate foreign exchange reserves and pay the short term cost, because the cost and distortions of not doing so in the long term would be far worse and damaging”, admitted the Central bank chairman.

 

Categories: Economy, Politics, Uruguay.

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