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Document Type

Case Study

Case Series

Broad-Based Asset Management Programs

JEL Codes

G01, G28

Abstract

As the Latin American sovereign debt crisis spread through the continent during the early 1980s, foreign investors began to abandon Uruguay out of fear that it would devalue its currency like Argentina did in March 1981. Five small- to medium-sized commercial banks in Uruguay faced solvency crises as a result. Although the Central Bank of Uruguay (CBU) decided that a full, direct intervention into the failed banks was not necessary due to their size, the CBU arranged for the sale of the banks to foreign financial institutions, while assuming the non-performing portfolios of the failed banks to facilitate the transaction. The CBU purchased about $416 million in non-performing loans, which were denominated in both local and foreign currency. The CBU funded the purchases by issuing $311 million in bonds and promissory notes (denominated in U.S. dollars) to the banks and writing off $105 million in previous financial assistance to the banks. Instead of creating an asset management company to handle these non-performing assets, the CBU simply assumed the portfolios onto its balance sheet. This move resulted in a lack of transparency on loan recovery and discharge data, as well as several parliamentary and judicial investigations. Despite forming a National Office of Asset Recovery in 1984 to facilitate loan recovery, the CBU likely wrote off a sizeable portion of the non-performing portfolios every year as operating losses after loan recovery results proved disappointing.

Date Revised

2021-06-30

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