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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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