Uruguay Senate OKs emergency banking bill

MONTEVIDEO, Uruguay -- Congress approved emergency legislation shoring up Uruguay's battered financial system Sunday, voting to block access to some long-term deposits in the country's two state banks.

"This will be difficult medicine, but it's the only possible solution," Economy Minister Alejandro Atchugarry told lawmakers.

The government blocked access to long-term deposits at the two state banks for three years. The accounts -- similar to certificates of deposit in the United States -- require depositors not to withdraw funds for an extended period in exchange for higher rates of interest.

They would continue to earn interest during the freeze.

Checking and savings accounts would not be affected by the measure, and neither will deposits at private banks.

After passing the Senate and the House, the package was sent to President Jorge Batlle to be signed into law.

Analysts estimate that the move will lock up approximately $2.2 billion in the financial system until confidence can be restored.

Uruguay closed all private and state banks last Tuesday after weeks of panicked withdrawals by depositors. The country is in a four-year recession exacerbated by the unraveling of the Argentine economy next door, and reserves have plunged from $3 billion a year ago to $655 million.

The adoption of the emergency banking laws, coupled with a promise of emergency aid from Washington this weekend, raised hopes that the government would reopen the banks as early as Monday.

Leftist lawmakers opposed the legislation, but did not have the votes to block approval.

In Washington, sources in the Bush administration disclosed Sunday that the United States would extend a $1.5 billion emergency loan to Uruguay.

The U.S. assistance will be repaid in a matter of days once the South American nation receives a new loan package from the International Monetary Fund, the U.S. officials said on condition of anonymity.

Treasury Secretary Paul O'Neill left Sunday for Brazil, and was expected to visit Uruguay and Argentina later in the week.