Uruguay Lost Half Its Deposits and Paid In Full — Transcript

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1. 0:02Two hundred seventy-one thousand, three hundred fifty-one dollars.
2. 0:05That is the interest Uruguay paid the United States Treasury on a bridge loan of nearly one and a half billion dollars.
3. 0:10It drew the money on a Monday.
4. 0:12It paid it back that Friday.
5. 0:13Four days.
6. 0:14The promise came on the Sunday before.
7. 0:16That promise is what opened the doors of Uruguay's banks on Monday morning.
8. 0:20This is the story of a country that lost half its deposits in a year and still paid its bondholders every cent it owed them.
9. 0:27Not one dollar of debt was written off.
10. 0:30The lenders got all of it — just five years later than promised.
11. 0:34In those same years output fell four years running, and poverty climbed from a quarter of the country to nearly a third.
12. 0:40Both of those are the same story, and you cannot tell one of them honestly without the other.
13. 0:45December first, two thousand one.
14. 0:47Argentina's Decree number one five seven zero caps cash withdrawals at two hundred fifty pesos, or two hundred fifty American dollars, per week.
15. 0:54Per depositor.
16. 0:55Per institution.
17. 0:56Argentines called it the corralito.
18. 0:58The little fence.
19. 0:59Weeks later, in late December, Argentina defaulted on roughly eighty-one point eight billion dollars of bonds.
20. 1:04But the money behind that fence was not all in Buenos Aires.
21. 1:08At the end of two thousand one, non-residents held forty-one percent of all private deposits in the Uruguayan banking system.
22. 1:15About six point two billion dollars.
23. 1:18And roughly eighty percent of that belonged to Argentines.
24. 1:21Montevideo was the safe deposit box for the country next door.
25. 1:24So when Argentina fenced in its savers, it did not just freeze Argentine banks.
26. 1:28It told every Argentine with an account across the river one thing.
27. 1:31Go and get your money now, while you still can.
28. 1:34Uruguay was not a bystander to Argentina's crisis.
29. 1:37Uruguay was where Argentina kept its savings.
30. 1:40The first bank fell in February two thousand two.
31. 1:43Banco Galicia Uruguay, the subsidiary of an Argentine parent, dealing mainly with non-residents.
32. 1:48Suspended.
33. 1:48Fourteen billion dollars sat in the Uruguayan banking system that December.
34. 1:51Seven billion a year later.
35. 1:53Uruguayans queued.
36. 1:54Argentines emptied the vault.
37. 1:56Over the year, non-resident deposits fell about sixty-five percent.
38. 1:57Resident deposits fell about thirty percent.
39. 2:00Forty percent of the money was already gone by midyear, and the World Bank's
40. 2:06own report on the crisis puts the fall across the full year at fifty percent.
41. 2:10Half.
42. 2:12The safe deposit box was emptying, and it was mostly the neighbors emptying it.
43. 2:17In June two thousand two, President Jorge Bat-zheh told Bloomberg television that Argentines were a gang of thieves, from the first to the last.
44. 2:24Every one of them.
45. 2:25On the fifth of June he flew to Olivos to apologize to President doo-AHL-day in person.
46. 2:30On the twentieth of June, Uruguay gave up defending its exchange rate.
47. 2:33It abandoned the band and let the peso float.
48. 2:36The dollar went from about seventeen pesos to twenty-three in a single day.
49. 2:40At some exchange houses it touched twenty-seven within hours.
50. 2:43Across the year the rate moved from fourteen point six eight to twenty-seven point zero five.
51. 2:49The peso lost roughly forty-six percent of its dollar value.
52. 2:53And prices did not explode.
53. 2:55Inflation rose from four point four percent in two thousand one to fourteen percent in two thousand two, and to nineteen point four percent the year after.
54. 3:02High.
55. 3:02Painful.
56. 3:02Nothing like a currency collapse.
57. 3:04That is what a dollarized economy does.
58. 3:06It absorbs the blow in balance sheets instead of price tags.
59. 3:09Nobody's grocery bill doubled.
60. 3:10A dollar debt, measured in pesos, got nearly twice as heavy.
61. 3:14Hold on to that one.
62. 3:15It comes back.
63. 3:17Central bank reserves stood at about three point one billion dollars at the end of two thousand one.
64. 3:22At the end of July two thousand two they were six hundred fifty-five million.
65. 3:26Roughly eighty percent gone in seven months.
66. 3:28Then a single day.
67. 3:29The thirty-first of July.
68. 3:30The peso is quoted moving from twenty-six to thirty-three per dollar inside one session.
69. 3:35Deposits are down about five billion dollars on the year, to roughly eight billion.
70. 3:39And the banks are losing about seventy million dollars a day.
71. 3:42Every day.
72. 3:44No reserve position survives that arithmetic for long, and Uruguay's had already been spent.
73. 3:49Economy minister Alberto Ben-see-OWN resigned on the twenty-second of July.
74. 3:54Alejandro Ah-choo-GAH-ree took over on the twenty-fourth.
75. 3:57On the twenty-sixth, the entire board of the central bank was replaced, with Julio day BROON as its new president.
76. 4:02Four days later, the banks would close.
77. 4:05The thirtieth of July, two thousand two.
78. 4:07Uruguay declares a bank holiday.
79. 4:09Then it extends the holiday by seventy-two hours through Decree number two nine zero,
80. 4:13citing the central bank's intervention of Banco de Montevideo and Banco La Caja Obrera.
81. 4:17The banks reopen on Monday the fifth of August.
82. 4:20The press could not agree on that at the time.
83. 4:22In the wire accounts it lasted twenty-four hours.
84. 4:24Or four days.
85. 4:24Or five days.
86. 4:25Or a week.
87. 4:26The decree is the arbiter.
88. 4:28Declared the thirtieth, extended seventy-two hours, doors open Monday the fifth.
89. 4:33On the second of August, crowds looted around twenty-five supermarkets on the outskirts of Montevideo.
90. 4:38Roughly thirty people were detained.
91. 4:40Twenty-five supermarkets is a small number in absolute terms.
92. 4:43In Uruguay it was a shock.
93. 4:45The whole reason Argentines banked there was that nothing ever happened in Uruguay.
94. 4:49And now the shutters were down.
95. 4:52The International Monetary Fund had been in the room since March.
96. 4:55A stand-by arrangement approved on the twenty-fifth of March, topped up in June and again in August,
97. 4:59until the Fund's commitment reached about two point eight billion dollars.
98. 5:03Money in three portions, and not one of them could open a door on Monday morning.
99. 5:06On the fourth of August, three lenders spoke with one voice.
100. 5:10The International Monetary Fund.
101. 5:11The World Bank.
102. 5:12The Inter-American Development Bank.
103. 5:15Together they would raise total financing for Uruguay to three point eight billion dollars, and push about one and a half billion of it into the following week.
104. 5:22That same Sunday, the United States Treasury signed an agreement to provide up to one and a
105. 5:26half billion dollars of short-term bridge financing to Uruguay's central bank, out of the Exchange Stabilization Fund.
106. 5:32Uruguay drew one billion, four hundred sixty-six million dollars on Monday the fifth.
107. 5:37It repaid the loan in full on Friday the ninth, with two hundred seventy-one thousand, three hundred fifty-one dollars of interest.
108. 5:44Four days.
109. 5:45One correction.
110. 5:46The Associated Press wire at the time credited the Federal Reserve.
111. 5:50It was not the Fed.
112. 5:51It was the Treasury's Exchange Stabilization Fund, and the error has been copied forward ever since.
113. 5:56Treasury Secretary Paul O'Neill stood next to Bat-zheh at a press conference in Montevideo on the sixth of August.
114. 6:03Also on the fourth of August, Uruguay's Congress passed the banking stability law.
115. 6:07It created a stabilization fund for the banking system, and it reprogrammed foreign-currency
116. 6:11time deposits at the two state banks, the Banco Republica and the mortgage bank.
117. 6:16Twenty-five percent extended up to one year.
118. 6:18Thirty-five percent up to two years.
119. 6:20Forty percent up to three years.
120. 6:21At above-market interest.
121. 6:23About two point two billion dollars was locked up.
122. 6:26That is not nothing to lose.
123. 6:27It is also not the same thing as losing it.
124. 6:29And hear what was not touched.
125. 6:31Checking accounts, untouched.
126. 6:33Savings accounts, untouched.
127. 6:35Every deposit at every private bank in the country, untouched.
128. 6:38Argentina capped what every depositor at every bank could take out in cash.
129. 6:42Two hundred fifty a week, per depositor, per institution.
130. 6:45Uruguay froze one instrument, at two state banks, on a published schedule, with interest.
131. 6:49Narrow.
132. 6:50Dated.
133. 6:50Paid for.
134. 6:51The banks reopened on Monday the fifth without panic.
135. 6:54Four of the twenty-two banks in Montevideo's financial district stayed shut by order of the central bank.
136. 7:00Liquidity support to the system reached about two point four billion dollars by the end of August.
137. 7:06Roughly twenty percent of that year's gross domestic product.
138. 7:10A month after the reopening, on the fifth of September, Decree number three four nine went further.
139. 7:15It guaranteed foreign-currency sight and savings deposits at the state banks as they stood on the thirtieth of July,
140. 7:20and authorized advance payments of up to four hundred twenty million dollars to account holders of the four suspended banks.
141. 7:27None of this was free.
142. 7:29About twenty-eight thousand five hundred depositors of the failed banks were never made whole.
143. 7:33Not reprogrammed.
144. 7:34Not guaranteed.
145. 7:35Left.
146. 7:35They waited twenty years, and what came back depended on which bank had happened to hold their money.
147. 7:39Between twenty-eight and sixty-two cents on the dollar.
148. 7:42Three banks went into liquidation at the end of two thousand two — Banco Montevideo,
149. 7:47Banco Comercial and Banco La Caja Obrera — with combined negative equity of eight hundred thirty-nine million dollars.
150. 7:53That hole is what those depositors were standing in.
151. 7:57So who paid?
152. 7:59Some of it was the state — which is to say everyone.
153. 8:02The liquidity support.
154. 8:03The guarantee.
155. 8:03The advance payments.
156. 8:05All of it public money, loaded onto a debt ratio already heading past one hundred percent of output.
157. 8:09And remember the dollar debt — the same devaluation that took the dollar from
158. 8:13about fifteen pesos to twenty-seven made every dollar of it eighty-four percent heavier in pesos.
159. 8:18The government was carrying one too.
160. 8:20Central government debt went from forty point six percent of gross domestic product to
161. 8:25ninety-five point three in a single year, and peaked at one hundred five point six.
162. 8:30New borrowing was not the main driver.
163. 8:33The debt was in dollars, and that same devaluation did the rest.
164. 8:37Some of it was those twenty-eight thousand five hundred depositors.
165. 8:41And some of it was everyone else.
166. 8:43The economy shrank four years running.
167. 8:45Nineteen ninety-nine, two thousand, two thousand one, two thousand two.
168. 8:48The last of those years took nearly eight percent off output.
169. 8:51Eleven, by the ruler in use at the time.
170. 8:54On the statistics institute's own two thousand two methodology, poverty went from twenty-four point three percent of people in two thousand two,
171. 9:00to thirty-one point three in two thousand three, to thirty-one point nine in two thousand four.
172. 9:07On the statistics institute's later methodology the peak falls in that same year,
173. 9:11two thousand four, and it is higher — thirty-nine point nine percent.
174. 9:15That is a different series.
175. 9:16You cannot add it to the first.
176. 9:18Poverty was still climbing a year after the bondholders had been dealt with.
177. 9:23The people who lost the most in Uruguay's crisis were not the people holding Uruguay's bonds.
178. 9:29How would you have split that cost?
179. 9:32At the height of the crisis, Uruguay's sovereign spread had passed two thousand basis points.
180. 9:37The market did not expect to be repaid.
181. 9:39The immediate problem was concrete.
182. 9:40Four hundred seventy-one million dollars of debt service falling due in two thousand three.
183. 9:44Equal to four point four percent of the previous year's output.
184. 9:47Uruguay could not pay it.
185. 9:48Uruguay would not repudiate it.
186. 9:50So on the tenth of April, two thousand three, it offered a third option.
187. 9:54An international offer covering about three and a half billion dollars of bonds.
188. 9:59A concurrent domestic offer on roughly one and a half billion of Uruguayan-law bonds.
189. 10:03And a bondholders' meeting on thirty billion yen of two point two percent Samurai bonds due two thousand six.
190. 10:09About five point four billion dollars eligible in total.
191. 10:12Roughly five years added to the maturities.
192. 10:14Coupons exactly as written.
193. 10:16Principal exactly as written.
194. 10:17Not a haircut.
195. 10:18A reprofiling.
196. 10:19Pay you everything, later.
197. 10:21And it would only complete if eighty percent of holders said yes.
198. 10:25They said yes.
199. 10:26The international offer expired on the twenty-second of May, two thousand three, and settled on the twenty-ninth.
200. 10:31Overall participation, ninety-three percent.
201. 10:33Eighty-nine point two percent of the internationally issued bonds.
202. 10:36Ninety-eight point eight percent of the domestic ones.
203. 10:38About five billion dollars of the five point four billion eligible was exchanged.
204. 10:42At the Japanese bondholders' meeting, holders of eighty percent of the Samurai bonds were represented,
205. 10:48and more than ninety-nine percent of the votes cast approved the change in payment terms.
206. 10:54That was the first use of collective action clauses under Japanese law.
207. 10:57And the seven percent who did not take the exchange?
208. 11:00Uruguay paid them in full, on their original terms.
209. 11:02The Samurai holders were the exception.
210. 11:04There, the payment terms were changed by a vote, and the dissenting minority was bound by the majority.
211. 11:09Now sit in the bondholder's chair.
212. 11:10Ninety-three percent was not good manners.
213. 11:13Tendering cost you five years of waiting and nothing else.
214. 11:16No principal written down.
215. 11:17No coupon cut.
216. 11:19Against a haircut, five years is cheap — and the government was saying openly that the alternative was default.
217. 11:25Which is where the word voluntary starts doing real work.
218. 11:28The new bonds carried a clause.
219. 11:29If a large enough majority agreed, the terms changed for everyone.
220. 11:33Holding out alone stopped being possible.
221. 11:35And the offer used exit consents, which stripped legal protections out of the old bonds as people left them.
222. 11:40The paper you kept got worse the moment your neighbors tendered.
223. 11:43The cost was real, but small.
224. 11:46The International Monetary Fund put the net present value loss at about twenty percent.
225. 11:50We hold to the Fund's number, and it is worth naming which one,
226. 11:53because the standard academic estimate for the external exchange is nearer thirteen percent.
227. 11:58On that measure it is the mildest restructuring in the sample from nineteen ninety-eight to two thousand five,
228. 12:03against seventy-three percent for Argentina in two thousand five.
229. 12:06And the rating agencies were not charmed.
230. 12:09Standard and Poor's had already cut Uruguay from double B minus to B in late July two thousand two.
231. 12:16By the reports that survive, in connection with the exchange Standard and Poor's cut it again,
232. 12:20to Selective Default, and Fitch cut it to triple D.
233. 12:24It was a default.
234. 12:25Everyone had simply agreed to it.
235. 12:27When the alternative is default, what does ninety-three percent participation mean?
236. 12:32The lasting product of those seven weeks was not the bonds.
237. 12:36It was the paperwork.
238. 12:37Uruguay's two thousand three exchange introduced dual-limb aggregation — the mechanism that lets a sovereign bind
239. 12:42holders across a whole stock of bonds at once, instead of fighting them issue by issue.
240. 12:47It is now standard in sovereign bond documentation worldwide.
241. 12:50Five months later, Citigroup and U.B.S.
242. 12:53bought about five and a half billion pesos of peso-denominated bonds.
243. 12:58An instrument the Republic had never issued internationally before.
244. 13:02The underwriting agreement is dated the fifteenth of October, two thousand three.
245. 13:06By the end of two thousand six, real output had recovered to one hundred sixteen percent of its pre-crisis level.
246. 13:12Now set that against the neighbor.
247. 13:13Argentina came to its own creditors in two thousand five.
248. 13:16It took sixty-two point three billion dollars of the eighty-one point eight billion eligible.
249. 13:21Seventy-six point one five percent.
250. 13:23The holdout litigation ran until two thousand sixteen.
251. 13:27A reopening in two thousand ten brought the total to about ninety-two point six
252. 13:31percent — near enough the number Uruguay reached in seven weeks in two thousand three.
253. 13:36That is the argument, and it is a real one.
254. 13:38But keep both ledgers open, because they close at different speeds.
255. 13:41The creditors' ledger closed in May of two thousand three, and the market was buying again by October.
256. 13:46The other one stayed open.
257. 13:47Unemployment did not come down.
258. 13:49Sixteen point six percent in two thousand two.
259. 13:52Sixteen point seven in two thousand three — the year of the exchange.
260. 13:57Inflation that year was nineteen point four percent.
261. 13:59A sovereign restructuring is scored by the people who get paid,
262. 14:03and on that scorecard Uruguay's is the mildest of the years from nineteen ninety-eight to two thousand five.
263. 14:08Uruguayans were scored on a different sheet, and on that sheet the same years look nothing alike.
264. 14:12Both sheets are accurate.
265. 14:14An account that shows you only the first sheet is selling you something.
266. 14:18Like this because it shows what the standard version leaves out: a restructuring that wrote off nothing,
267. 14:23sitting alongside four years of contraction and a poverty rate that went from a quarter of the country to nearly a third.
268. 14:29The unsettled part is what that means — if not the bondholders, who should have borne the shock.
269. 14:33If you add the numbers up differently, the comments are where that case belongs.
270. 14:37Uruguay talked its creditors round in seven weeks, and wrote off nothing.
271. 14:41The country across the river needed a second attempt, five more years,
272. 14:44and holdout litigation that ran until two thousand sixteen, to arrive at roughly the same place.
273. 14:49The difference was not the negotiators.
274. 14:51It was who got handed the bill in each country.
275. 14:53Next time: the default nobody agreed to.