Paraguay banking crisis: A lesson in counterparty risk

The Paraguayan banking crisis is a cautionary tale of counterparty risk.

The collapse of Ueno Bank left nearly 3 million customers unable to access their bank accounts. That is roughly 60 percent of Paraguay’s adult population.

The bank had grown so large that Paraguayan businesses report an 80 percent drop in business since the government shut the bank down.

The Paraguayan central bank shut down Ueno after investigators discovered questionable loans to companies with inadequate collateral and weak documentation. According to the Guardian, Ueno had half the solvency necessary to meet its obligations.

The crisis has worked its way up to the highest level of Paraguayan politics, leading to the impeachment of President Santiago Peña, his house arrest, and, as of the most recent update, his being held in pretrial detention at a military facility. Authorities charged the president with “breach of trust and administration for personal gain.”

Shortly after taking office in 2023, Peña appointed Ueno’s CEO to head up Paraguay’s central bank. A short time later, Carlos Carvallo Spalding authorized Ueno, then a finance company, to become a digital bank.

Historian and political analyst Fabián Chamorro told the Guardian the bank received special treatment under the Peña administration.

“During Peña’s administration, Ueno began receiving various benefits, and the government relaxed the rules to allow public funds to be invested in the bank."

Chamorro said an estimated $800 to $860 million in state and pension funds were invested in Ueno.

About 32,000 pensioners whose funds were invested in the bank aren’t receiving payments.

Meanwhile, millions of everyday people cannot access their money.

Pedro Volpe said when he opened his app last week, he couldn’t even see his account balance.

“Now I’m having to work miracles to pay my bills. A lot of people can’t even afford basic everyday things like food; luckily, I still had some money saved elsewhere, but that has only got me this far. I don’t know what I’ll do next week.”

Giovanni Catolino told El Economista that he fears he’s lost 16 years of work. He said between $15,000 and $16,000 is now frozen at the bank.

Leila Cosini is a 28-year-old student. She said her savings account remains inaccessible.

“It leaves me very uncertain; it makes me very anxious.”

She said she chose Ueno because it was easy to open an account and she liked the online accessibility.

The government has a guarantee fund that covers deposits up to $38,000. About 90 percent of individual account holders have less than that amount. 

That's great, but it doesn't help people who need money to pay bills now.

According to the Guardian, last week, the central bank began repaying customers with up to $1,565, no outstanding debts, and an existing account at another institution. However, Paola Benítez said she met all the criteria but hasn't received any of the money she was saving for her wedding. 

“This has made me a bit anxious, a bit desperate too, because honestly, who am I supposed to go to and ask about this? It’s very strange, very confusing, very sad.”

Counterparty risk rears its ugly head

This is an extreme example of counterparty risk coming home to roost.

This risk stems from the possibility that the party on the other side of a transaction might not fulfill its obligation.

For instance, if I loan you $200, you might never pay me back. That possibility represents counterparty risk that I’m taking on.

Most transactions and investments involve some level of counterparty risk. If I invest in a stock, the company could go belly-up. If I buy a government bond, there is a chance that the issuing country could collapse politically. If I rent out my house, the tenant might stop paying.

And while you might not realize it, putting money in the bank comes with counterparty risk.

Paraguayans just found this out the hard way.

It’s easy to look at the Paraguayan situation and conclude that something like that can’t happen here. Of course, it can. And it has. And even if we’re not talking about a systemic bank failure, a natural disaster could easily take your bank offline. If you don’t have power and internet, your cool app is useless. You’re functionally broke.

This is why it’s imperative to have an easily accessible emergency fund. You should always have enough cash on hand to survive at least a couple of weeks with no access to your bank accounts.

Of course, holding cash comes with its own counterparty risk. The government that issues your money constantly devalues it as a matter of policy. If all goes as planned, that cash in your safe will have about 10 percent less purchasing power in five years than it does today.

That’s why your best bet is to hold silver for barter transactions.

Junk silver is ideal for this job.

Junk silver consists of dimes, quarters, and half-dollars minted before 1965.

Of course, junk silver isn’t junk. It would be more accurate to call their modern equivalents junk.

Junk silver coins are 90 percent silver and worth far more than their face value. At the current spot price of silver ($52.56), a 1964 quarter’s melt value is about $9.41.

You can see why junk silver would serve as a perfect barter currency. Virtually everybody recognizes silver's value. It is also easy to transport, and the coins are uniform in shape and weight.

You could almost certainly barter on the fly using junk silver. However, you’d be even more secure if you established barter networks before a crisis.

One thing is certain: you don’t want to count on the bank to protect your money. While it might seem unlikely, you could lose access to your money at any time. All it would take is a natural disaster, political malfeasance, or a broad-scale financial crisis.

Protect yourself. Keep hard money where you have access to it. Don’t wait for the crisis. You don’t want to find yourself in Volpe’s situation, wondering how you’re going to pay your bills.