Correction: Fitch: Uruguayan Debt Exchange Sign of Financial Pressure.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 27, 2002

(This is an amended version of an earlier press release. The correction is in the fifth paragraph, the financial system support package amount is US$1.4 billion)

The Uruguayan authorities yesterday completed a US$170 debt exchange with the country's four domestic pension funds. The pension funds will exchange treasury bonds, 2003 maturity Global bonds, frozen bank deposits and USD cash for peso-denominated inflation-indexed bonds maturing in 2012. Fitch believes that this transaction is indicative of liquidity pressures, and could presage additional exchange offers to come. Should future debt exchanges involve substantial upfront losses to bondholders in NPV terms, Fitch could consider such exchanges as events of default. The Long-term foreign currency issuer rating for Uruguay is 'B' with a Negative Outlook.

Fitch Ratings recently completed a rating visit to Uruguay and will complete a full review in the coming weeks. Given Uruguay's heavy financing needs, the closure of the financial markets to the Uruguayan sovereign, doubts about medium-term debt sustainability, and ongoing problems in the banking system, Uruguay's sovereign ratings remain prone to further downgrades, and hence remain on negative outlook.

The exchange offer, which was extended to both public and private pension funds, may yield substantial amortization relief through 2005. Uruguay has approximately US$1.1 billion in amortizations due to private creditors between December 2002 and December 2003, inclusive. Scheduled disbursements from multilateral institutions of approximately US$1.35 could cover these needs, but would leave little reserve protection in the event of resident deposit outflows or other capital account pressures. The offer to exchange dollar-denominated obligations for peso-denominated obligations exposes bondholders to substantial exchange rate risk, for which they may not be adequately compensated. Given the regulatory power of the sovereign, it remains unclear whether or not this exchange was undertaken in an atmosphere of duress.

Concerns about public debt sustainability have increased dramatically this year as public debt to GDP has risen sharply due to the 48% nominal depreciation of the peso, a real GDP contraction of approximately 10%, and a bank bailout. End-2002 public debt is likely to reach 100% of GDP. With a poor outlook for growth in 2003 and continued pressure on the exchange rate possible, debt to GDP could rise even further. Although fiscal adjustment is under way and real wage compression should help authorities achieve a primary surplus next year, it is unlikely that the improvements in fiscal flows will be sufficient to reverse the trend of rising debt in GDP terms. Resident and non-resident deposits have increased slightly since the second week of October, as have international reserves. The run on deposits and the consequent drain on reserves had been a key driver of Fitch's downgrade to 'B' in July 2002.

The freeze on term deposits at public banks, intervention in four private banks, and US$1.4 billion financial system support package from multilaterals have all contributed to the stabilization. Potential pressures on deposits remain, however. Beginning in August of 2003, approximately US$475 million in frozen deposits will be released from accounts in public sector banks. The remaining private banks, largely in foreign hands, have no deposit guarantees or frozen deposits, and are thus vulnerable to confidence shocks.

On the political front, there is a general consensus among the three primary parties to resolve the status of four intervened banks but none are committed to selling state assets in order to meet debt obligations. President Battle of the Colorado Party faces approval ratings below 20%, and governability will be challenged by the National Party's withdrawal of its ministers from the government. The National Party affirmed its willingness to support the government in the legislature on a case-by-case basis, and there do not appear to be any major policy discrepancies with the Colorados, but changes in economic policy may now come more slowly. Weak confidence in the government is likely to be a drag on domestic consumption and investment, and could make dealing with any future banking problems harder to control.