Uruguay Capital Market: Law-in-the-Books or Law-in-Action?*
Siandra, Eduardo, Ibero-americana
From mid 1990s up to early this century Uruguay has passed important legislation to lay the foundations of capital market development as a part of a package of market-friendly reforms in a vein of others attempted in most Latin America.
The immediate goal was to make the country's business and corporate law more hospitable to domestic and foreign investment. Innovative areas were exchanges, investment and pension funds, securitization, factoring, and trusts. Furthermore, reforms were carried out in corporate bonds and investment regime. A primary allocation of regulatory powers left an ample room to market participant self-regulation with the last resort oversight of the Central Bank.
More specifically, since mid 1990s important legislation regarding capital markets has been passed: Exchanges and Corporate Bonds Law (1996), Investment Funds Law (1996), securitization and Factoring Law (1999), and Trust Law (2003). The Social security Reform Law (1995) was partly a leading driver of this legislation by setting the stage for pension funds (AFAPs), major stakeholders in the domestic capital market development. Legal innovation and reform are still unfinished tasks: attempts to reform the bankruptcy code have been unsuccessful.
We do not discuss every aspect of the legal reform. Rather, we focus on bankruptcy, funds, and trusts. We ask what the central innovation was. With a diagnostics of weak protection of investor's rights, the introduction of "fund" (and later on the more general "trust") as an asset or collection of assets endowed with a legal identity making them autonomous of the managers or shareholders' fates, whether be natural or legal persons, collateral for project finance could be placed more safely and managed more professionally. By that time many Latin American and European countries already imported and adapted these legal institutions from Anglo-Saxon tradition.
Policy reforms in this area entail the use of the legal infrastructure merely as a highway on which other reforms and development can go at a faster pace. Following Fanelli-Popov (2003), they are typically "procedural", i.e., they are supposed to set an adequate frame for better development performance. Beyond the establishment of legal and regulatory framework on which we plan to focus here, the "legal making", the State has had an important actual market building role as a major short and long horizon security issuer. Early good regard of social security reform and successful inflation control were rewarded with the achievement of investment grade in 1997, giving great momentum to the GOU public debt issues at local and global levels.
The gap between the "real world" and the law is widely acknowledged in Latin America. When the "rule of law" and "law and order" are a larger or smaller extent defective, what can legal reform achieve? If societies are more regulated by non-legal social norms, organized in more or less self-governing bodies, how to approach best legal infrastructure reform? Esquirol (2003) discusses at length this issue for Latin America legal systems.
At the time of writing a major political shift has taken place: the first left-winger political force in history is taking office after its crushing electoral victory at the end of 2004. In principle, there are signals that the new administration will pursue capital market institutional development further, in part because the gigantic twin crises of 2002 left the banking system in a fragile position to grant credit at pre-crisis levels. Although prospective is difficult in unchartered waters, this paper attempts to highlight opportunities and perils of capital market development under the new political framework.
In this paper we try to understand the gap between the "law-in-thebooks" and "law-in-action" in Uruguay capital market legal reform and to draw some policy lessons. The presentation is organized as follows: a) description of the reform process, b) brief survey of theoretical and empirical work on the relationship between financial and legal systems, c) an examination of the domestic reform process in the light of theoretical and empirical material laid out in "b", and closes with d) evaluation, lessons, and perspectives under the new political scenario. …