Paraguay’s Crisis Raises Concerns About Potential Risks to Brazil

Brazil is closely watching political and economic turmoil in neighboring Paraguay, where the suspension of Banco Ueno’s operations has been followed by resignations at the 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, cooperate in managing the Itaipu hydroelectric plant and are members of Mercosur. Brazilian officials have not identified a direct impact on Brazil, but are concerned that prolonged instability could affect regional cooperation and Brazilian interests.

The Banco Central del Paraguay ordered Banco Ueno to suspend operations after identifying liquidity problems at one of the country’s major financial institutions. Prosecutors opened an investigation, and at least eight people connected to the bank’s management group were arrested. The bank crisis also led the central bank’s president and two directors to resign. Before taking the central bank post, its president had led Banco Ueno.

Peña was impeached amid allegations and suspicions linking him to the bank crisis. He had been a shareholder in the bank’s management group during the first two years of his term. He tried to resign before the impeachment, reportedly seeking to retain legal protections and a lifetime Senate seat, but Congress rejected his resignation. Police arrested him at his home in Asunción on Friday night, Nov. 6. Vice President Pedro Alliana took over as president after the impeachment.

Brazilian officials view South American stability as a strategic concern, and the crisis could affect Brazilian companies or complicate regional integration projects, depending on its scale and duration. A prolonged disruption in Asunción could hinder Mercosur negotiations, weaken trust among member governments and make it harder to coordinate trade and infrastructure policies. Political scientist Rogerio Pereira de Campos said Brazil, as the region’s largest country and economy, might have to help restore balance, warning that political or economic deterioration could also harm Brazil.

The Brazilian government has approached the situation cautiously, treating the crisis as an internal matter for Paraguay while monitoring developments. Brazil also hopes for a smooth transition after Peña’s impeachment. Lula congratulated Alliana in a social media message, expressing a desire to work with him openly and cooperatively to strengthen bilateral ties and advance South American integration. Lula also said he hoped to welcome Alliana in Brasília to discuss shared priorities and give new momentum to the countries’ relationship.

Itaipu Binacional said the crisis should not disrupt the Brazilian side’s operations. The company said no funds managed by its Brazilian side were deposited or invested in Banco Ueno, and that Itaipu’s power generation and supply were continuing normally. Inaugurated in 1982, the plant was built jointly by Brazil and Paraguay on the Paraná River, along their shared border. Each country owns half, while the management of each side is independent.

The potential effect on Itaipu as a whole remains unclear. Paraguay’s side is among the public institutions that invested funds in Banco Ueno, which closed this week. The total amount is not known, but estimates indicate that Itaipu’s Paraguayan side had approximately 89.9 million Brazilian reais invested through the company’s pension fund, putting retirement funds for employees on that side at risk.