ARGENTINE DEPOSITS IN URUGUAY ON THE RISE

UNCLAS MONTEVIDEO 000106 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ARG UY SUBJECT: ARGENTINE DEPOSITS IN URUGUAY ON THE RISE ¶1. Deposits by non-residents -- mainly Argentine nationals -- in Uruguayan banks rose by a significant 41 percent in 2008 to USD 2.5 billion (equivalent to 18 percent of total deposits). The increase is largely attributed to a perception by depositors of an increase in instability in neighboring Argentina. (NOTE: The USD 2.5 billion figure excludes records in off-shore banks operating in free trade zones that manage deposits of approximately USD 900 million, since according to Uruguay's Central Bank such deposits are counted as booking of operations between Brazil and the U.K. and not as pure deposits. END NOTE). Uruguay's Central Bank is confident that the recent hike in non-resident deposits does not pose a threat to the local banking system, and the Bank is not concerned by press reports indicating the GOA is trying to attract Argentine deposits back to Argentina. ¶2. Uruguay's Central Bank is confident in the strength of local banks (all but one are foreign-owned) to weather a possible storm in Argentina for three main reasons: first, even after the recent increase, non-resident deposits remain at a manageable rate (FYI: before the 2002 local banking crisis, foreign deposits amounted to as much as 41 percent of total deposits. END FYI). Second, Uruguay's Central Bank greatly improved bank supervision following that crisis. Strict liquidity requirements, combined with slow moving loans, have given banks plenty of liquidity. The average liquidity ratio (short term assets/short term liabilities) now stands at 60 percent. Solvency indicators are also good, with banks having about twice the net worth mandated by the Central Bank. ¶3. The third key element contributing to the strength of local banks is that they have not loaned to Argentine firms, in part because of Central Bank regulations. Reduced exposure is important in the Uruguayan context because -- on top of massive deposits withdrawals by Argentines -- a large part of the 2002 banking crisis was triggered by the fact that Uruguayan banks were not able to recover loans made to Argentine firms and banks. While some firms did not pay back as they went broke in the crisis, others could not pull out their funds in the face of the "corralito" (the freezing of deposits in Argentine banks which took place from Dec. 2001-Dec. 2002). ¶4. COMMENT: We agree with the Central Bank's assessment that the level of foreign-owned deposits poses much less of a threat to the stability of the banking system under current conditions than they did back in 2002. In fact, the 2002 crisis helped improve the overall banking system significantly. We do not expect any significant impact of the GOA's reported measures on local deposits since it is generally thought that Argentine depositors in Uruguay are seeking a relatively safe place to hold their petty cash close to home. MATTHEWMAN