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Taylor praises Uruguay's sound economic policies

Treasury official describes 2002 effort to aid Uruguay's banking system

Posted: February 15, 2005

A core principle of the United States' economic strategy for Latin America and the rest of the world is to provide strong support for nations that pursue prudent economic policies, says Under Secretary of Treasury for International Affairs John Taylor.

Taylor received the Medal of the Oriental Republic of Uruguay at the Embassy of Uruguay in Washington on February 14. In remarks at the ceremony, he said the U.S. policy toward nations facing economic turmoil "is based on our firm belief that without sound policies on the part of the country itself, international assistance cannot yield successful results."

Taylor explained that the case of Uruguay in 2002 is an excellent example of how the United States was able to support a country implementing sound economic policies, while also dealing appropriately with financial contagion stemming from external crises.

Taylor outlined U.S. efforts to support the Uruguayan banking system in 2002, which culminated in a $1.5 billon short-term loan to the government of Uruguay to stem a bank run resulting from Argentina’s financial crisis.

As a result of the Uruguayan government's sound policies and U.S. support, Uruguay’s economy has rebounded from the 2002 crisis and has enjoyed a projected growth of 12 percent in 2004, with inflation and unemployment rates falling considerably, the Treasury official noted.

Taylor said the United States looks forward to working with new Uruguayan President Tabare Vazquez to build on these achievements, both in Uruguay and in the region as a whole.

"Our shared challenge is to sustain that momentum by putting in place microeconomic policies that encourage Latin American entrepreneurs to risk their capital at home," he said.

Following is the text of Taylor's remarks, as prepared for delivery:

(begin text)



FEBRUARY 14, 2005

Thank you very much for inviting me here today and for this honor. I am pleased to have had the opportunity to work with Ambassador Fernández-Faingold, Minister Alfie, and other members of the Uruguayan government to help Uruguay through the difficult period in 2002. President Batlle and his economic team deserve high marks for their achievements in putting Uruguay back on the path of growth.

A core aspect of the Bush administration's economic strategy for Latin America and the rest of the world is to provide strong support to countries that are pursuing sound economic policies. Our strategy is based on our firm belief that without sound policies on the part of the country itself, international assistance cannot yield successful results. We have applied this philosophy in our work to prevent and contain financial crises and to bolster economic growth in the region.

Another early focus of the Bush administration was to deal with financial contagion and define clearly when a response from the international policy community is appropriate and desirable. We emphasized early on that contagion was not automatic, and that policy responses had to take this into account. This is important because reacting to false alarms about contagion can lead to support of countries that are not following strong and sustainable policies. At the same time, it is important to recognize instances where countries are pursuing strong policies but are hit by external shocks beyond their control that damage their economies.

Uruguay is an excellent example of how these two elements -- (1) supporting countries that are implementing good economic policies and (2) dealing appropriately with contagion -- came together.

Uruguay had a solid record of market-oriented economic policies when the crisis in Argentina caused a bank run in the Uruguayan banking system. I was in close contact with Uruguayan government and IMF officials during the first half of 2002, as they tracked the decline in deposits and formulated a response to it. The first step was for Uruguay to draw on its existing IMF program. Then, a new IMF program was launched in March and augmented in June, with the aim of building reserves in the financial system and bolstering public confidence that the government's finances were being put on more sustainable footing.

It became by the early summer that these measures were not enough to stop the run. More needed to be done to stabilize the situation and prevent a breakdown in the payments system that would compound the damage to Uruguay's economy. We assembled a team at the Treasury covering all aspects of the situation, covering fiscal and debt, monetary, banking, legal, IMF, and MDB-related issues. We began a series of intensive meetings with Uruguayan and IMF officials to develop a strategy for confronting the bank run decisively.

The key challenge was this: because Uruguay's banking system was dominated by dollar deposits, the central bank did not have the ability to print money to satisfy the demand for withdrawals. Depositors saw that the central bank's foreign reserves -- even with the earlier IMF loans -- totaled less than the amount of dollar deposits in the system. Therefore, depositors were rushing to get their money out before the system ran out of dollars. In our discussions with the Uruguayan team and the IMF, we agreed that the only way to convince people to keep their money in the banks was to back deposits dollar-for-dollar. Backing all deposits in the system was not viable because of the amount of funds that Uruguay would have to borrow would have been too large. Working line-by-line through the various categories of deposits, we worked with the Uruguay and the IMF to develop a plan to fully back dollar checking and savings deposits while reprogramming dollar time deposits.

To financing the deposit guarantee plan, we reached agreement on a package that mobilized additional funds from the IMF, World Bank, and Inter-American Development Bank. In addition to reprogramming time deposits, the Uruguayan government would take strong measures to suspend the operations of four private domestic banks. The U.S. Treasury provided a short-term, $1.5 billion ESF loan to the government of Uruguay to provide a bridge to the disbursement of funds from the international financial institutions.

Events have shown that the package and bridge loan were a success in both the short and in the longer term. Our bet to support Uruguay's future has paid off. The rapid provision of financial support bolstered confidence and enabled Uruguay to reopen the banks without a resumption of the bank run. The bridge loan from the U.S. Treasury was repaid in just four days.

The Uruguayan government followed through on its commitments to keep economic policies on track. With stability returning, the government successfully executed a debt exchange in May 2003 to put the country's debt on a sustainable path. It put in place fiscal policies aimed at bringing down debt levels. Through expenditure restraint and strengthened tax administration, the government increased the primary balance from a deficit of 1.2 percent of GDP in 2001 to a surplus of 3.6 percent of GDP in 2004. As the government proceeded with financial sector reforms and confidence improved, resident bank deposits of the non-financial private sector recovered to about 80 percent of their pre-crisis level and growth of bank credit to the private sector (excluding NPL write-offs) turned positive in 2004.

Let's look at the results of these good policies and our support. In 2002 the economy contracted by 11 percent, inflation surged to 26 percent, and unemployment rose to 18 percent. By last year, Uruguay's economy grew a projected 12 percent, inflation was reduced to close to 7-1/2 percent, and unemployment fell to roughly 12 percent.

We very much look forward to working with the incoming Vazquez administration to build upon these achievements, both in Uruguay and in the region as a whole. Thanks to better policies in many countries, the region is currently enjoying the fastest rate of economic growth in a quarter century. Our shared challenge is to sustain that momentum by putting in place microeconomic policies that encourage Latin American entrepreneurs to risk their capital at home.

Our assistance to Uruguay is just one example of President Bush's continuing commitment to the region--a commitment reflected in areas as diverse as our support for countries confronting financial crises, to the Free Trade Area of the Americas (FTAA), to the Millennium Challenge Account (MCA) for our Hemisphere's poorest countries, to the initiatives launched at last year's Summit of the Americas to reduce the cost of remittances and increase the availability of bank credit to small businesses. Through working together in these and other areas, we can lay the foundation for a future with more prosperity and less poverty for all people in our hemisphere.

Thank you again for this honor.

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