Paraguay Crisis Could Put Brazil’s Regional Ties and Itaipu Partnership Under Strain

Brazil is closely monitoring the political and economic crisis in Paraguay, where the suspension of Banco Ueno has been followed by resignations at the country’s central bank and the impeachment and arrest of President Santiago Peña. The two countries share more than 1,000 kilometers of border, have nearly 200 years of diplomatic relations and jointly manage the Itaipu hydroelectric plant. Brazilian officials are watching for possible effects on regional stability and cooperation, though there is no indication so far that the turmoil has directly affected Brazil.

Paraguay’s Central Bank suspended Banco Ueno’s operations after identifying liquidity problems, prompting prosecutors to open an investigation. At least eight people linked to the bank’s management group have been arrested. The crisis also led the central bank’s president and two directors to resign. Before taking the central bank position, its president had headed Banco Ueno. Peña, who was a shareholder in the bank’s managing group during the first two years of his presidency, was impeached amid accusations and suspicions of involvement in the scandal. He tried to resign before the impeachment, reportedly seeking to retain legal protections and a lifetime Senate seat, but Congress rejected his resignation. On Friday night, Nov. 6, police arrested him at his home in Asunción.

Brazilian officials view South American stability as strategically important, particularly because Brazil is a leading advocate of regional integration. Brazil and Paraguay are founding members of Mercosur and share responsibility for Itaipu, which is built on the Paraná River along their border. Paraguay is also home to more than 250,000 Brazilians, one of the largest Brazilian communities abroad. Depending on how severe and long-lasting the crisis becomes, it could affect Brazilian companies, complicate regional integration projects and make it harder for Mercosur members to coordinate trade and infrastructure policies. A prolonged crisis could also strain trust among governments and slow negotiations within the bloc.

Political scientist and professor Rogerio Pereira de Campos said Brazil could be called on to help restore stability. “Brazil, as the region’s largest country and biggest economy, may have to try to bring things into balance, because a negative political or economic situation is unhealthy and could also have a harmful impact on Brazil,” Campos said. The Brazilian government is proceeding cautiously, treating the crisis as an internal matter while respecting Paraguay’s sovereignty and following developments closely. It also hopes the transition after Peña’s impeachment will be peaceful.

Pedro Alliana, Peña’s vice president, took office as Paraguay’s president after the impeachment. On Friday night, Brazilian President Luiz Inácio Lula da Silva wished Alliana success and said he wanted to work cooperatively with the new government to strengthen bilateral relations and advance integration in South America. Lula also said he hoped to welcome Alliana to Brasília to discuss shared interests and give fresh momentum to the countries’ longstanding ties.

Itaipu Binacional said the crisis should not affect operations on the Brazilian side. The company said no funds managed by its Brazilian division were deposited or invested at Banco Ueno, and that the hydroelectric plant was operating normally, without effects on electricity production or supply. Inaugurated in 1982, Itaipu is owned equally by Brazil and Paraguay, although each country manages its own side independently. The impact of the banking scandal on the binational company remains unclear. The Paraguayan side is exposed because it is among the public institutions that invested funds in Ueno. The total amount has not been established, but estimates indicate that Itaipu’s Paraguayan division had about 89.9 million Brazilian reais invested through its pension fund, putting retirees’ funds at risk.