Banking crisis grips Uruguay

The peso's value is falling and the economy shrinking

Uruguay has closed all of its banks, as the country's economic crisis tightens its stranglehold.

The Central Bank announced that it had suspended all banking operations, in an eerie echo of similar moves that took place in neighbouring Argentina.

In Argentina's case the move was seen as the only practical solution to prevent a run on the banks after consumers lost confidence.

The exact reason for Uruguay's closure of the banks was not given, as Central Bank officials met to discuss the crisis.

It was also unclear as to when the banks would re-open.

In response to the measure, the Uruguayan peso lost almost 23% of its value on Tuesday.

Panic at the banks

In recent weeks, there has been a massive amount of withdrawals from Uruguayan banks.

Uruguayans fear becoming the next Argentina

This has taken about 33% of deposits out of the country's financial system during the first six months of the year, according to official figures.

The problem has been exacerbated by mass withdrawals of cash by Argentines from their Uruguayan bank accounts.

The launch of an investigation into the capital flight prompted a second wave of panic withdrawals, this time by the Uruguayan people.

Currency dive

Uruguay floated its currency late last month following a run on banks and a plunge in foreign reserves.

New Economy Minister Alejandro Atchugarry faces a tough task

This was in part due to the knock-on effects of financial problems in Argentina and Brazil.

International reserves at Uruguay's Central Bank have fallen 76.6% since January.

After exchange rate controls were abandoned, the value of the Uruguayan peso fell about 30%.

Following its latest dive on Tuesday, a US dollar would now buy 35 pesos.

Economic crisis

The country's economy, which has experienced a three-year recession, relies on agriculture, tourism and banking.

An even deeper recession in Argentina has intensified fears that Uruguay could also face a sustained downturn.

Earlier this month, Uruguay's President Jorge Batlle appointed Alejandro Atchugarry as the country's new economy minister.

His predecessor, Alberto Bension, resigned on after losing support for his programme of austerity measures.

Earlier this year the economy shrank by 10% in three months, as the effects of the Argentine crisis were felt across South America.