2002 Uruguay Banking Crisis

This chapter discusses the banking crisis that unfolded in Uruguay from late 2001 through 2002 as a banking sector crisis that developed at the same time as a banking crisis, a fiscal crisis, and a public debt crisis. The 2002 crisis is set against the backdrop of the long‐term structure of the Uruguayan banking sector, which, unlike other Latin American countries, developed a mix‐up of local private banks, foreign banks, and large public banks. The case of the Uruguay banking crisis of 2002 is also relevant insofar as it showed the high level of its dependence on foreign capital on either assets or liabilities and led to the strengthening of banking regulation and supervision by the end of the crisis. The first section outlines the macroeconomic conditions at the origins of the banking crisis before 2002; the second section outlines the outbreak and development of the crisis since late 2001. The third section offers a description of policies implemented to face up to the crisis of the banking sector in the framework of combined fiscal, debt, and growth crises that shook the Uruguayan economy throughout 2002. Finally, this chapter stresses how the financial crisis that stemmed from the banking system affected Uruguay on multiple levels: revenues, sovereign debt, domestic growth, and fiscal sustainability, as well as the capitalization and increased dependence of the economy on foreign lenders and foreign currency‐denominated loans.