It quickly became clear last year that Uruguay would not escape Argentina's crisis unscathed. Argentines had long used Uruguay's offshore banking system as a convenient refuge for their money and Argentine vacationers are the mainstays of the country's important tourist industry. In early 2002, Uruguay lost its investment grade status and its banks' deposit base fell $7 billion as Argentines pulled their money out of the country, driving central bank reserves down to critical levels. As spreads on Uruguay's bonds rose to 2,500 basis points, it seemed only a matter of time before Uruguay followed Argentina into default.
Instead, Uruguay mandated Citigroup to lead an exchange of its old bonds for new ones to ease its mounting debt payments. Uruguay had $1.88 billion in debt amortizations due in 2003 alone. Horst Köhler, the International Monetary Fund's managing director, in a statement warned that a successful exchange was a...
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