US Grants $1.5 Billion Loan to Aid Uruguay, IFI Funds to Follow

The US and international lending institutions agreed to boost a
financial-rescue package for Uruguay, buffeted by fiscal turmoil in
neighboring Brazil and Argentina, report Dow Jones and the Wall Street
Journal. The move will increase the existing emergency international aid
package for Uruguay from $3 billion to $3.8 billion, funds intended to
restore confidence in the country's banking system-sapped largely by
withdrawals by Argentines desperately taking home money they thought would
be safe in stable Uruguay.

Washington agreed to provide a $1.5 billion short-term loan, to be
replaced by funding from the IMF, the World Bank and the IDB, the story
notes. Also reporting, Agence France-Presse notes that the US
announcement came after a joint statement from IMF, World Bank and IDB
officials stating they would accelerate existing disbursements worth $700
million to Uruguay in order to make $1.5 billion dollars available next
week, once authorized by their respective boards. Reuters, ABC (Spain),
El Mundo (Spain), Le Figaro (France) and the Financial Times also report.

The WSJ notes that Bush administration officials said they expect the US
loan to allow Uruguayan banks, closed last Tuesday to cut off a run on
deposits, to reopen on Monday. The decision signals a remarkable
about-face by the Bush administration, which came into office questioning
the wisdom of large financial bailouts of developing countries and is now
providing help to Uruguay and expressing support for aid to embattled
Brazil.

Perhaps most striking is that instead of relying solely on the IMF and its
funds, as he had earlier promised to do in such cases, US Treasury
Secretary Paul O'Neill is offering US money to tide the Uruguayans over.
O'Neill, who arrived last night in Brazil and will visit Uruguay and
Argentina this week, is tapping the Exchange Stabilization Fund, a pool of
resources available to the Treasury secretary to stabilize
foreign-exchange rates.

The New York Times (08/05) notes that Gene Sperling, who coordinated
economic policy during the second term of the previous US administration,
praised the move to aid Uruguay but said it represented a clear policy
shift for the Bush administration as it faces the threat of economic
contagion in Latin America. "This is an appropriate policy shift brought
about by economic reality," said Sperling, who is now a senior fellow for
economic policy at the Council on Foreign Relations. "It's one thing to
make a categorical statement during a campaign denying the existence of
contagion. It's another thing to confront contagion like in Uruguay."

The flurry of activity [at the US Treasury and the international financial
institutions] came after the Uruguayan Congress scrambled to approve the
Banking System Stability Act, aimed at averting a default on the country's
international debt payments and allowing the government to block the
withdrawal by account holders of hard currency held in state banks for up
to three years in exchange for higher rates of interest, says AFP.
Checking and savings accounts will not be affected. The bill also sets up
a special fund of $1 billion to reinforce the Uruguayan central bank, and
sets aside a further $400 million to help guarantee the activities of
three other banks in which the state is involved.

The new legislation, a precondition to the release of new international
financial aid and the reopening of the banking system, is likely to be
unpopular with the public, who stampeded to ATMs and looted supermarkets
when the system was shut down last week. Uruguayan officials have
attempted to quell public fear that the country might implement measures
as neighboring Argentina did in December to limit consumers' access to
their savings, which in millions of cases were frozen, devalued or lost.

In the first seven months of 2002, total bank deposits in the country have
fallen by 40 percent, BBC Online (08/05) notes. The Uruguayan economy has
been in recession for three years, and its peso has sunk in value from 17
to the US$ in late June, to its current level of 28 to the US$. Foreign
reserves have dwindled to $655 million from $3billion a year ago, the Los
Angeles Times (08/05) adds.