MercoPress. South Atlantic News Agency

Strong support for Uruguay

Uruguay has been promised an additional one billion US dollars to support its financial system that has been exposed to the impact of Argentina's current political and economic turmoil.

Uruguayan government sources indicated that multilateral financial organizations in Washington are closely monitoring Argentina and its potential regional contagion, particularly Uruguay, Brazil, Chile and Paraguay. "Uruguay is in the front line and it's only natural that they should be concerned", indicated Uruguayan Ministry of Economy sources. Uruguay's strong banking system has traditionally been a safe haven for Argentine depositors, and since the situation worsened a year ago, almost two billion US dollars crossed the River Plate.

However, particularly since last December former President De la Rúa was forced to resign by street rioting that left thirty people dead, and fearing Uruguay might also have to freeze bank assets, Argentines began withdrawing their deposits from Montevideo and sending them to New York and Europe.

This atmosphere rapidly spread to the whole system when two local banks had to be intervened by the Uruguayan Central Bank. Although the situation is now under control, the erosion of deposits continues although at a lesser rate.

Last March IMF approved a new stand-by loan of 743 million US dollars for the comingUruguayan budget year 2002/2003, plus another 183 million US dollars from the previous stand-by loan.

Uruguayan sources indicate that another billion US dollars will be forthcoming from the World Bank, Interamerican Development Bank and additional IMFfunding during the next twelve months. "These funds have a double purpose, a strong message of support and greater liquidity for the financial system".

Uruguay approved drastic cuts in expenditure for the next budget year, increased taxes and confirmed a 2,4% monthly devaluation of the currency. This means2002 will end with devaluation above 33%, and an expected inflation below 9% which should help foreign trade with and a strong competitiveness recovery.