An Analysis of the 2002 Uruguayan Banking Crisis

Abstract

The authors review the series of events that led to the 2002 Uruguayan banking crisis, assess the current status of the Uruguayan banking sector, and analyze the policy responses undertaken by the Uruguayan authorities to counteract the crisis. The main conclusion from their analysis is that although the immediate trigger for the crisis was caused by contagion resulting from Argentina's financial crisis, the spread and magnification of the crisis that engulfed the Uruguayan economy was amplified by certain weaknesses of the Uruguayan economy in general, and the domestic banking sector in particular. The authors also believe that the policy responses adopted by the Uruguayan authorities were mostly adequate, allowing Uruguay to successfully counteract simultaneous banking and public debt crises. Most important, the Uruguayan authorities were able to overcome a severe crisis while preserving the necessary trust in banking contracts, achieving a high level of social stability and political cohesion, and maintaining a fluid dialogue with multilateral financial institutions and all affected parties. The cooperative and consensual approach taken by the authorities created the necessary conditions to overcome some of the important obstacles to the recovery of the domestic banking sector.