US pumps $1.5bn into Uruguay to avert Latin American crisis

The United States last night made a dramatic intervention to avert a fresh financial crisis in Latin America by providing an emergency loan of $1.5bn (£955m) to Uruguay.

The Bush administration has agreed to forward the cash to allow the South American nation's banks to open today for the first time in almost a week.

The move is an effort to end the looting of supermarkets last week that was sparked by the bank closures. It was the worst violence in a decade in a country known for its social and financial stability in an otherwise tumultuous region.

The US Treasury last night agreed to provide the money in the form of a loan to be repaid in a matter of days once Uruguay receives a new loan package from the International Monetary Fund.

It is the first time that President George Bush has sanctioned a direct rescue for a crisis-hit nation.

Analysts said the US intervention represented the scale of the threat that it believes an outbreak of financial panic and rioting would pose to the world economy.

The speed with which the loan was agreed also reflects the dramatic plunge into crisis faced by Uruguay in the wake of the turmoil suffered by neighbouring Brazil and Argentina.

The White House has repeatedly insisted it would not follow the example of the Clinton administration and use taxpayers' money to fund bailouts. Under last night's deal, Uruguay will repay the $1.5bn once the IMF funding comes through.

Yesterday Uruguay's Congress approved a bill proposed by the Economy minister, Alejandro Atchugarry, to restrict withdrawals of deposits linked to the US dollar for three years; the money would draw interest.

Mr Atchugarry said the proposal was the "only solution" to the crisis. It was expected the IMF would grant approval for new assistance once Congress passed Mr Atchugarry's plan.

Paul O'Neill, the US Treasury Secretary, arrived in Brazil yesterday, and will later visit Uruguay and Argentina.

His swift action over Uruguay is likely to smooth his reception in the wake of his recent comments about the Brazilian government. Mr O'Neill last week infuriated the Brazilian government when he said that Washington would oppose fresh financial aid unless he could be sure the money would not end up in "Swiss bank accounts".

Uruguay,dubbed the "Switzerland of Latin America" because its banks attract funds from across the region, had a solid credit rating at the beginning of this year. But cash-strapped Argentine depositors have been withdrawing money steadily, and panic conditions struck Uruguay in recent weeks as Brazilian financial markets suffered a battering. Brazil's currency, the real, has lost about a quarter of its value against the US dollar because of investor fears about a leftist victory in the October presidential election.

Uruguay's currency, the peso, has lost about half its value since it was floated in June and is now trading at about 28 to the dollar.

Reserves have plunged from $3bn a year ago to $655m now amid huge withdrawals, corruption scandals hitting some banks and the fallout from Argentina.

Joaquin Cottani, an international economist for Lehman Brothers in New York, said Uruguay was bound to be looked on kindly by the Group of Seven nations because it was an "innocent bystander".

But he added: "To stop the run on deposits and re-establish confidence in the banking system, good policies are perhaps more important than any additional amount of cash Uruguay can realistically receive from its official creditors."

With stock markets across the world suffering huge losses, the G7 is anxious to prevent a fresh financial crisis undermining confidence further.

Last week the Economist Intelligence Unit in London said the risk of a crisis in Latin America is at its highest level since 1997.