Uruguay's peso falls after banks ordered closed

Anahi Rama, Reuters, Montevideo

Uruguay's government temporarily halted activity at all banks on Tuesday to stop a crippling run on deposits, sparking a slide of over 14 percent in the value of the peso.

Worried depositors who lined up at banks found that cash machines had been turned off after the South American nation's spiraling recession, due in part to turmoil in neighbors Brazil and Argentina, forced the first bank holiday in decades.

The peso closed down 14.3 percent at 30 pesos to the dollar in exchange houses, although volume was low. The local currency has now shed 50 percent of its value since June 18, the last day before the government freely floated the peso.

Uruguay's government sent a team of officials to Washington last week to ask for International Monetary Fund aid to cover the bleeding of cash from its once-solid banking system, but no official response has been made public yet.

The U.S. Treasury Department said in a brief statement on Tuesday afternoon that the United States was monitoring Uruguay's problems closely and would support further aid from the IMF and other international institutions.

Uruguay's inter-bank currency market and other bank operations were halted by order of the Central Bank on Tuesday. Savings withdrawals have accelerated in recent weeks, with the financial system losing 33 percent of deposits in the first half of this year.

The government said the 24-hour bank holiday was ordered because of the Central Bank's decision to suspend operations at Banco Montevideo Caja Obrera, which was held by Argentina-based Grupo Velox before the government took control.

But ordinary Uruguayans said they feared the bank holiday would continue past Tuesday and be followed by the freezing of their bank accounts -- an exact repeat of the disastrous measures Argentina took late last year to halt a run but ended up sparking riots and placing banks there near total collapse.

"That's it, everything's imploding today. The deposit freeze is coming," said one man who lined up to withdraw cash from an automatic bank teller.

Uruguay, which as recently as this year was one of an elite few Latin American countries to hold "investment grade" credit status, has been battered by Argentina's ongoing financial woes and pre-electoral and debt jitters in Brazil.

Ratings agency Fitch on Tuesday cut its sovereign rating for Uruguay one notch, saying its reserves were at "precarious" levels. The Central Bank has seen its international reserves fall 79 percent since January.

Currency trade continued, however, and traders said they had been forced to raise the price of the dollar, widely used in unstable Latin America as an anchor for life savings, due to the bank holiday.

"We had to raise the price of the dollar because we need to cover ourselves since there are no reference prices today," one currency trader said.

Analysts said Uruguay, whose economy is largely dependent on agriculture, tourism and banking, will have to take action to shore up its financial system.

"They will have to put some kind of controls on the financial system, but they will be better off if the controls are more traditional capital controls and worse off if they have to put on extremely restrictive direct deposit controls," said Lacey Gallagher, director for Latin American economics at Credit Suisse First Boston.

Paraguay's Banco Aleman, also controlled by Argentina's Grupo Velox, was also hit by a fall in deposits.