Delegation: Oriental Republic of Uruguay

Committee: Economic and Financial Committee

Topic Area: Banking Policies for Avoiding Global Recessions

Ever since the decade of 1980, societies in western hemisphere

countries have had been submerged in an era of deregulation and faith
in the markets. (Sandel, 2013, p. 6) This ended after the U.S. real estate
market crashed in 2008, causing a financial tsunami of global
proportions. Such financial crash was only possible for two main
reasons: 1) the securitization of poorly supported home mortgages and
2) the financial markets of the world becoming increasingly intertwined
and interdependent on one another. Securitization can be defined as the
packaging of individual loans or other debt instruments –such as
mortgages—so that the resulting “package” can be enhanced in its
credit rating to further their sale to third party investors. (Kendall, L. &
Fishman, M., 1996, p. 15). Specifically, in mid-2007, there was a sharp
increase in default rates on low income housing mortgages in the US
(Reinhart, C. & Rogoff, K, 2011, p. 208), which meant that the values of
the securities on which such mortgages were supported began
decreasing in value. That wouldn’t have been anything out of the
ordinary, if it were not for two issues: 1) the credit agencies didn’t
devalue the credit rating of those securities whose value was decreasing
and—most importantly—2) the amount of debt which was based on
those securities and the number of financial institutions who were
owners of that debt was enormous. Indeed, the financial sector was the
equivalent to 8 percent of the GDP of the U.S. (p. 210) Although the
case presented in this paragraph is only one of many examples financial
crisis throughout history, it is the most recent and serious, not only
because of its magnitude, but because of the risk it posed on the world
economic stability.

The Oriental Republic of Uruguay faced a financial crisis in the years

2001 and 2002. In 2001, Argentina was forced to impose capital controls
and to freeze deposits to Argentinian nationals. As a result, private
banks in Uruguay began facing liquidity problems. This was possible due
to their high exposure to Argentina. (De la Plaza, 2005, p. 8) What this
means, is that an important part of deposits in Uruguayan banks were
owed by Argentinian institutions. Indeed, Uruguayan banks—Banco
Galicia Uruguay and Banco Comercial—were very sensitive to
Argentina’s economy even owned large amount of Argentina
government debt. At that time, it was imperative that the government
supplied liquidity to the banks. Because of the increase of withdrawals,
the banks were forced to suspend new loans, as well to request early
repayments of existing ones, translating the crisis into a system wide
credit crunch. At the end, 51 percent of deposits held by non-residents
had left the country, with a currency depreciated by 57 percent. (De la
Plaza, p. 11)

It is important to understand that the underlying base the Economic and

Financial Committee should be working with is the goal of restoring faith
in the financial institutions among citizens. With that in mind, the
delegation of Uruguay has two main priorities which will seek to
accomplish during this year’s session. Given the history of the country
with a banking crisis which jeopardized its financial health, the first is
introducing mandatory liquidity requirements for banks, for the purpose
of investing in derivatives and other instruments that deal with risk. The
second goal will be to establish make it easier to restructure
governments debt. The draconian measures which have been imposed
to mid-size economy countries in order to pay their debts are not only
one of the reasons citizens don’t trust international financial institutions
but are arguably unnecessary if the main goal get debt duly paid. Along
with the latter, fiscal policy will be key. It’s important that we reflect on
the fact that all modern nation-states are built on deficit spending, and
what that means to a global economy always in look for growth.
(Graeber, 2011, p. 4) What can be inferred from Uruguay’s two main
focuses is that we believe in, yes, more meaningful regulations for
private banks and institutions, but also in fiscal responsibility. This
delegation firmly believes that, although the final resolution will not be
binding, it is important that we lay the groundwork for international, as
well as domestic policy everywhere and in any way we can. Therefore,
Uruguay is eager to work in a productive and proactive way with all
delegations looking to ensure a healthy and secure financial future for
the world.

References

De la Plaza, L. & Sirtaine, S. (2005). An analysis of the 2002 Uruguayan

banking crisis. Policy, research working paper; no. WPS 3780.
Washington, DC: World Bank. Retrieved from
http://documents.worldbank.org/curated/en/232951468309324842
/pdf/wps3780.pdf

Graeber, D. (2011). Debt: The First 5000 Years. (1st Edition). Brooklyn,
NY: Melville House Publishing.

Kendall, L. & Fishman, M. (Eds.). (1996). A Premier on Securitization.

(Third Printing) Cambridge, MA: MIT Press

Sandel, M. (2013). What Money Can’t Buy: The Moral Limits of Markets.
(Reprint). New York, NY: Farrar, Straus and Giroux
Reinhart, C. & Rogoff, K. (2011). This Time is Different: Eight Centuries
of Financial Folly. (1st Edition, Reprint) Princeton, NJ: Princeton
University Press