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Uruguay Foreign Debt
Uruguay began borrowing abroad on a large scale in the
1970s
after the price of oil (its largest import) quadrupled.
The oil
price increase that prompted many developing nations to
begin
borrowing also made it easier for them to borrow;
commercial
banks were flush with petrodollars (foreign exchange
obtained by
petroleum-exporting countries through sales abroad) and
were
eager to make loans. Uruguay's debt increased from US$500
million
in 1976 to as much as US$5.9 billion by the end of 1987.
Although
this debt was already large in proportion to Uruguay's
GDP,
international financial conditions made the loans appear
beneficial for both the creditors (commercial banks and
international organizations) and the Uruguayan government.
The most significant positive trend, from the point of
view
of both parties, was the decline in the late 1970s of the
dollar's value, relative to major currencies. This decline
meant
that dollar prices of most internationally traded goods
were
rising, a fact that had double significance. First,
Uruguayan
exporters (like exporters in many other developing
countries)
were earning more dollars for a given basket of goods,
making the
country appear capable of repaying a large debt. Second,
real
interest rates (the nominal interest rate minus inflation)
were
negative. That is, the rate at which the dollar value of
Uruguay's exports was rising (about 30 percent per year in
1979)
was higher than the nominal United States interest rate
(11
percent per year in 1979). Thus, it was becoming easier
for
Uruguay to service its external debt. Under these
conditions, the
government was inclined to continue borrowing abroad to
finance
its deficit and to fund development projects.
The situation changed dramatically in the 1980s for
several
reasons. First, the dollar appreciated significantly. This
reversed the process that had occurred in the 1970s; the
dollar
price of Uruguay's exports fell. Second, the United States
tightened its money supply. This prompted banks to raise
interest
rates on both old and new loans (the adjustable interest
rate had
become common in the 1970s). Both of these developments
raised
the real interest rate on Uruguay's debt. As the dollar
appreciated, the peso declined, making the dollar value of
Uruguay's GDP smaller and the ratio of debt to GDP larger
(with
both debt and GDP denominated in dollars). At the same
time,
lower export earnings made it more difficult for Uruguay
to
service its external debt. New loans were needed just so
that the
country could service old debt, even though foreign
borrowing had
become far less attractive than in the 1970s. In 1985 the
total
debt burden stood at US$4.9 billion; debt service
(interest
payments alone) consumed 34 percent of the nation's export
income.
The debt crisis overshadowed all other economic
difficulties
in Uruguay during the late 1980s. The crisis was a vicious
circle. Paying off the debt required higher growth and
higher
income. But the mere act of paying debt service on the
huge
amounts of principal reduced essential investment spending
and
precluded sustained economic growth. While the debt
continued to
grow, finding the means of servicing the debt became an
economic
priority; Uruguay was one of the few Latin American
countries
that did not default on its debt. While debt service
became
difficult, new external loans were no longer available
(except to
help service old debt) because Latin American debtors were
no
longer considered creditworthy. Thus, the government had
to
resort to inflationary means ("printing money") to finance
its
public-sector deficit domestically. This directly
contradicted
the government's primary goal of eliminating inflation.
The Sanguinetti administration's debt policy focused on
the
most immediate difficulty for Uruguay: large debt-service
payments. Through negotiations with its creditors,
including the
International Monetary Fund
(
IMF--see Glossary), the government
was able to gain some breathing space. The debt-service
burden
declined to an estimated US$449 million in 1989 (28
percent of
export earnings) from US$613 million in 1988 (44 percent
of
export earnings). However, the fact that debt was merely
being
rescheduled meant that the overall debt burden did not
decrease.
New financing actually added to the debt, which increased
to
US$6.7 billion by the end of 1989. Several projects to
reduce the
debt principal were carried out under the debt-for-equity
program, but they were small compared with the total debt.
During
the 1988-89 period, the Central Bank approved fourteen
investment
projects that reduced the debt by an estimated US$78
million.
Substantive efforts to decrease a portion of the debt
burden-
-the US$1.7 billion owed to commercial banks--began in
March 1989
in the context of the United States government's Brady
Plan. In
an important departure from earlier United States policy,
the
Brady Plan (named after Secretary of the Treasury Nicolas
Brady)
officially recognized the need for debt reduction.
Minister of
Economy and Finance Ricardo Zerbino and Central Bank
president
Ricardo Pascale began debt negotiations with international
creditors in September 1989.
The Brady Plan offered commercial banks holding
Uruguayan
debt three options. (The same three options applied in the
case
of other Latin American nations, with minor variations in
the
percentage terms of each option.) First, the banks could
increase
their current loans by 20 percent over four years,
offering
Uruguay new money in exchange for strengthened guarantees
of
repayment. Second, banks could exchange their debt for
guaranteed
bonds (backed by United States Treasury bonds) paying a
fixed
6.34 percent interest. Finally, banks could opt to allow
Uruguay
to repurchase its debt for 56 percent of the debt's face
value.
In a tentative agreement reached in 1990, banks holding 28
percent of the debt chose the new money, banks with 33
percent of
the debt chose to convert to fixed-interest bonds, and
those
holding the remaining 39 percent chose to allow Uruguay to
repurchase its debt. The agreement was significant even
though it
affected only about one-fourth of Uruguay's debt. As the
Economist reported, "Once a country has reached a
Bradyplan deal, it is on the road to financial respectability."
Data as of December 1990
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