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Uruguay decides to freeze deposits and take IMF aid

Uruguay will receive US$1.5 billion from the IMF and freeze some bank deposits as part of a plan to stop the mass withdrawals that have threatened to cripple the financial system.

Economy Minister Alejandro Atchugarry said the IMF would vote as soon as Wednesday to approve the funds. A proposed law would freeze up to US$2.2 billion of term deposits at Banco de la Republica Oriental del Uruguay and Banco Hipotecario del Uruguay for three years.

Widespread withdrawals of bank deposits, prompted by trade partner Argentina's US$95 billion debt default and devaluation, have drained deposits and forced Uruguay to shutter its weakest banks.

Economists said Uruguay's willingness to control spending and close banks may prevent a collapse like Argentina's.

"Uruguay has done the things they need to do," said Abel Viglione, a senior economist at the Fiel economic research company in Buenos Aires. "They closed down the banks that are doing badly and now will reinforce the good banks with these foreign loans."

By emptying reserves, a run on the banks could also force Uruguay to default on its US$6.6 billion sovereign debt. Unlike neighboring Argentina, Uruguay said it would limit its deposit freeze to certificates of deposits at the state-owned banks.

Argentina froze term as well as savings and checking accounts at all of its banks in late 2001, setting off a week of protests and food riots that left 27 dead and toppled President Fernando de la Rua. Uruguay, which posted riot police this week to quell looting near the Capital, is seeking to avoid the kind of social unrest that followed Argentina's bank freeze.

"I would be surprised if Uruguay makes the same mistake that Argentina made and imposed an across-the-board freeze," said Fernando Losada, a senior economist at ABN Amro Securities LLC in New York.

The economy minister didn't provide details on how the IMF money would be spent. Uruguay is seeking to restore confidence in its banking system and prevent more withdrawals by depositors, including Argentines who have used Uruguay as an offshore banking center for generations.

Part of the IMF funds may be delivered through a bridge loan from the US Treasury that will be paid back later with IMF money.

The government will seek congressional approval to set up a special US$1.1 billion fund to back savings and checking accounts at the two state banks, the economy minister said at the press conference.

Speaking on live television in Uruguay and Argentina, Atchugarry pleaded for understanding from depositors who have withdrawn about US$100 million a day, or about US$2 billion, this month. The country, which devalued its currency on June 20, has been hard hit by economic collapses at its trade partners Argentina and Brazil.

"We're asking for the understanding of fixed-term depositors so that this situation stabilizes," Atchugarry said. "We need to ask them to wait, which we don't want to have to do but this will allow the banks to be totally stable."

Analysts said legislators are likely to approve the deposit freeze this weekend. Under it, a quarter of the assets will be returned at the end of the first year, 35 percent after two years and the remaining 40 percent after three years. Interest paid on the assets will be raised by an amount yet to be determined.

Luis Alberto Heber, a senator from President Jorge Batlle's ruling coalition, said approval of the law is a condition for receiving the IMF money.
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