Volume 44, Number 172,
January-March 2013
The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
THE CASE OF URUGUAY

As mentioned in the introduction, the Argentinean and Uruguayan crises were very different. While Argentinean banks entered into crisis as a result of a macroeconomic crisis and a strong external shock, the Uruguayan system entered into crisis due to both external factors as well as imbalances caused by their own banks. Both in Argentina and Uruguay, public banks played a decisive counter-cyclical role, but due to the differences between the two crises, the contribution of public banks to the macro-economies of the two countries manifested itself in a very different way. While public banks in Argentina mitigated the effects of an ongoing crisis, Uruguayan public banks slowed the same development of the crisis that surged from the banks operating in the country. Before talking about the actions taken by public banks in Uruguay, it is necessary to examine the broader context of the Uruguayan crisis.

It is no coincidence that this article first presents the Argentinean case; the Uruguayan crisis was intimately affected by the Argentinean crisis. During the 1990s, the Uruguayan economy followed a similar trajectory to Argentina. Although Uruguay never applied measures as drastic as convertibility and systematic privatization, restrictive monetary policies were adopted, which also provoked a strong economic slowdown at the end of the decade. Although there were real similarities between the macroeconomic paths of both countries, the nature of their banking systems were very different. Since colonialism, Uruguay had served as a financial market for Brazil and Argentina, but particularly for the latter. Uruguay has a significant participation of foreign banks that dates back much longer than other countries in the region.

Up to the beginning of the current decade, the country’s financial system was divided into nearly equal proportions between foreign banks, local capital private banks3 and public banks. However, these groups undertook different strategies in the years leading up to the 2002 crisis. While both groups of private banks increased business with foreign clients, mainly Argentinean, local capital private banks also strongly expanded speculation, resorting to fraud in some instances. These two methods of expanding financial business established conditions ripe for a banking collapse in 2002.

When the partial freezing of deposits in Argentina was announced in December 2001, funds from the country kept entering the Uruguayan market, fulfilling its historical role as a safe haven for Argentinean savings. However, when the losses due to strong bets on Argentinean assets and the widespread fraudulent activities between all private banks directed by Uruguayans and Argentineans began to come out, almost all Argentinean deposits, which represented about 45% of deposits in the country at that time, were withdrawn in a matter of weeks, generating a full banking crisis.

But unlike its counterparts, the public Bank of the Eastern Republic of Uruguay (brous) —the largest in the system— never took part in speculation, did not lend to foreigners and maintained a minimum level of deposits from its clientele. The sudden withdrawal of Argentinean savings, and the deterioration of assets coming from that country, represented a clear external shock. However, the fact that banking balances were highly exposed to foreign actors had always represented a risky bet, taking away the direct control of national authorities. In the same way, the rapid deterioration in the price of Argentinean assets should not be seen only as an exterior shock. The strong positions that private local banks held in these assets —high yield but with a corresponding high risk— were not held by public banks. As an entity that is not governed by market forces, public banks are not exposed to the pressures that tend to provoke “herd” behavior to generate greater profits at the expense of assuming riskier positions.

Like their Argentinean counterparts, Uruguayan public banks were not exempt from practices that were damaging to their institutions. Their political loans, those that take on the form of a hidden State subsidy, significantly weakened their balances. In this way, on the one hand, private banks assumed losses for risky credit policies, while public banks were lugging around a bad portfolio due to irregular loans. At the same time, the drastic drop in credit was also due to factors specific to the Uruguayan crisis. In particular, the combination of a period of elevated interest rates with a high proportion of dollarized credits made large numbers of loans unable to be paid back, and affected all banking institutions. Beyond these factors, the effects of the policies to minimize exposure implemented by foreign banks explain another portion of the credit contraction.

As can be seen in Figures 5 and 6, the behavior of deposits varies more between the types of banks than between the types of assets. But once again, public banks were not isolated from negative results. Due in large part to poor management of the crisis by the federal authorities and, more specifically, the lack of communication between the brous and its clients regarding their ability to pay their deposits, there was a withdrawal of deposits from brous in the deepest points of the crisis. However, as demonstrated in Figure 5, this withdrawal was much lower when compared to the loss of deposits in private banks.

3 The owners of these banks were mainly Uruguayan or Argentinean. But in the latter case, they were not considered foreign banks, because their presence was limited to these two countries, unlike global banks that obey a different logic set.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
The opinions expressed by authors do not necessarily reflect those of the editor of the publication.
Permission to reproduce all or part of the published texts is granted provided the source is cited in full including the web address.
Credits | Contact

The online journal Problemas del Desarrollo. Revista Latinoamericana de Economía corresponds to the printed edition of the same title with ISSN 0301-7036