Reassembling a Financial System

When Argentina collapsed in late 2001, many Argentines who had sent their money to Montevideo for safekeeping began pulling their money out of Uruguay's banks. The deposit base of Uruguay's banks soon fell by almost half to $7 billion. The banking sector, comprised mostly of government banks, was already suffering huge losses brought on by an extended recession and a declining peso. As the central bank deployed more and more of its reserves last year to prop up failing banks, crisis ensued. Confronted with a liquidity crunch that threatened to force the country into default, the Central Bank ordered a week-long bank holiday in July 2002, the first in 70 years. It also intervened in and froze the assets of three local banks. Two of them, Banco Comercial and Banco Montevideo, saw their influential owners arrested and charged with fraudulently gutting their banks and hiding their exposure to Argentina. "We paid a huge price for allowing our system to be contaminated with so much foreign money," says Bernando...