Paraguay Bank Collapse Tests LatAm’s Credibility
Paraguay’s Ueno Bank meltdown and political crisis put Latin America in the midst of a governance reckoning.
When Ueno Bank’s sudden insolvency froze accounts for nearly 3 million people and toppled Paraguay’s presidency last week, it served as a brutal stress test for Latin American banking and raised urgent questions of institutional credibility, political cronyism and central bank independence.
Santiago Peña — removed as Paraguay’s president on Nov. 6 — is in pretrial detention at a military facility in Asunción after being charged in connection with Ueno Bank’s collapse. Last week’s credibility shocks also threaten to steepen yield curves and strain the limits of emerging-market central bank independence.
“Will central banks do their governments’ bidding?” William Jackson, Capital Economics’ chief emerging markets economist, wrote in a note to clients last week. Concerns about monetary policy credibility in the region’s two largest economies, Brazil and Mexico, could lead to weaker currencies and steeper yield curves, he explained.
No Accounts, No Groceries
Paraguay’s Congress moved quickly to rectify what it could. On Monday, it approved the appointment of economist Jorge Schreiner as the country’s new central bank governor. Schreiner was nominated earlier that day by Peña’s successor, President Pedro Alliana, after the dismissal of former central bank chief Carlos Carvallo Spalding.
Carvallo previously served as CEO of Ueno and oversaw Ueno’s transition from fintech to a full-fledged bank in 2023. Peña appointed him central bank chief that same year.
But the damage to Paraguay was already being felt by more than 60% of the country’s adult population who had accounts with the bank. After all, Ueno was Paraguay’s sixth-largest lender. When Ueno became insolvent, depositors immediately lost access to their funds.
“The collapse of Banco Ueno has been devastating to the people of Paraguay,” said Vinicius Okada da Silva, an assistant teaching professor of economics at the University of Tampa, in an email to Global Finance.
Reports from Brazil’s news conglomerate Globo, he added, show that “families couldn’t even buy food for the day because all their money was in the bank.”
Pensions Are Also Problematic
More than $300 million in public pension funds was held at Ueno, Okada said. On Monday, teachers protested over roughly $60 million in pension funds tied up at the bank. The government has pledged to cover up to $38,000 per depositor.
Okada said that is probably enough for most customers, but larger depositors have no guarantee they will be made whole.
“The biggest issue is the uncertainty the population and other institutions will face about when, if at all, they will get their money back,” he said.
There’s also the stigma associated with the cozy relationship between politics and private enterprise. “It misaligns the incentive a public official has, which is to improve the welfare of the population, with the incentive of the firms, which is to make profits,” he added.
Prosecutors have charged Peña and Carvallo with breach of trust, and both deny wrongdoing.
Contagion Risks Aren’t Likely
Capital Economics’ Jackson said the failure “doesn’t appear to point to broader financial stability risks.” He noted that the resolution is moving quickly, Paraguay’s banking sector is well capitalized, the current account is in surplus, and government debt is below 40% of gross domestic product. Paraguay’s currency, the guaraní, has fallen, and its bonds have sold off.
The bigger concern, Jackson said, is “whether a period of political uncertainty lies ahead that could stymie the reforms that have propelled strong growth.”
According to the IMF’s October 2026 World Economic Outlook, Paraguay’s real GDP is projected to grow by 4.5% in 2026. Yet financial consultants argue that institutional cleanup is long overdue.
“Ueno is the tip of the iceberg when it comes to cronyism and dangerous cartelization in Paraguay,” said Fergus Hodgson, author of “The Latin America Red Pill” and a financial consultant with Econ Americas. “Cleaning out these shortfalls will be part of Paraguay’s healthy development, and it needs to be done if Paraguay is to continue to be a hotbed for foreign investment.”
What’s Next
A broad loss of confidence could still trigger bank runs or push up borrowing costs, Okada warned.
“Fintechs do a lot of good, especially by providing credit and loans to poorer people, but that also means they need to take on more risk to succeed,” he said. “Combine that with the corruption already present in the region, and it can lead to disaster.”
In Brazil, allies of President Luiz Inácio Lula da Silva have reportedly warmed to a proposal by Brazilian economist André Lara Resende to cut the benchmark interest rate and reduce the government’s borrowing costs.
While Jackson of Capital Economics expects the plan to be rejected, “the mere discussion suggests the government is seeking ways to avoid major austerity.” While the debate continues, he said, “It’s hard to see the central bank resuming its easing cycle imminently.”
Last week, the Bank of Mexico, or Banxico, cut its key rate by a quarter of a percentage point to 6.25%.
Jackson called the move “hard to square with recent developments” and said questions about whether Banxico is favoring growth over its inflation target “should be taken seriously.” Still, he said there is “no smoking gun.” Unlike in Turkey, Colombia, and Brazil, Mexico has seen no “clear and explicit demands” from its president.
Currently, Banxico’s inflation projections for 2027 and 2028 are below even the lowest forecasts in the central bank’s own survey of analysts. Capital Economics now expects the peso to weaken to 20 per dollar by the end of 2027, down from about 18.7 now.
Another item to watch next month is the uncertainty over Jonathan Heath’s replacement. Heath is a hawkish Banxico board member whose term began in January 2019 and expires in December.
Anthony Noto covers corporate finance and private credit. Contact him at anoto@gfmag.com.
