$outh of the Border

August 12, 2002

ON THE EVE of his trip to Latin America, Treasury Secretary Paul O'Neill managed to offend his hosts -- and rattle their financial markets -- even before he got on the plane. Mr. O'Neill's latest symptom of foot-in-mouth disease involved his concern that foreign aid to Latin American countries not end up in Swiss bank accounts. Within days, the Bush administration offered up its own fiscal antidote: $1.5 billion in short-term loans to Uruguay to help shore up the country's addled banking system.

The pledge last week was a relatively inexpensive way to appease U.S. allies upset over Mr. O'Neill's remarks -- Uruguay is awaiting a larger financial package from the World Bank, the International Monetary Fund and the Inter-American Development Bank, which then will be used to repay Uncle Sam. But more importantly, the loan offer signaled an easing of the administration's hard line on big bailouts.

If the White House needed to back into that position, so be it. If the administration found cover in Mr. O'Neill's gaffe and South American visit, fine. Its intention to assess needs on an individual basis is a more reasonable approach to assisting American friends in financial need.

The financial problems in Latin America are nearing a critical stage, with Argentina's fiscal collapse leading the way. Uruguay's problems are the least of it.

Once known as the Switzerland of Latin America, Uruguay, whose 3.4 million people live in a country the size of Oklahoma, experienced a rush on its banks because of the crisis in neighboring Argentina. Argentine depositors whose accounts had been frozen withdrew their savings in Uruguayan banks, fearing a domino effect. But the more pressing concern has been Brazil, whose financial markets have been roiling. A corporate collapse could reverberate well beyond its shores.

On the last day of Mr. O'Neill's visit in Latin America, the IMF approved a $30 billion loan to Brazil -- the largest of its kind -- that should help stabilize the economy. The United States, a key member country -- perhaps reluctantly -- recognized the necessity to soften its previously tough talk on large bailouts and support the loan.

The U.S. support for the IMF loan and its short-term loan to Uruguay signal the Bush administration's willingness to help allies, provided they help themselves. In the case of Brazil, the U.S. Treasury referred to "the right economic policies in place." The outcome of the presidential race in Brazil, however, could well determine the fate of those policies and the stability of its markets.

As he left Buenos Aires last week, the straight-talking Mr. O'Neill sounded more encouraging about the prospects of Argentina securing IMF loans, despite its dismal record in policing its own financial house.

Encouraging but clear in what the United States requires: "the right policies in place."

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