Former Paraguayan President Santiago Peña was placed under house arrest on Friday over allegations of breach of trust, influence peddling and other offences, shortly after the Senate impeached him over the collapse of a government-linked bank that left nearly half of the country's six million people unable to access their savings.

All 44 senators present voted to remove Peña from office on charges of misconduct, making him the second Paraguayan president to be ousted through impeachment since the end of General Alfredo Stroessner's 35-year dictatorship in 1989.

The Senate's decision triggered celebrations among crowds gathered outside Congress in what had been considered one of South America's most politically stable countries. Depositors, pensioners and students wearing national football jerseys waved Paraguayan flags, embraced one another and chanted, "Dictatorship never again!"

The country's financial system was thrown into turmoil after regulators took control of Ueno Bank just three days earlier, triggering Paraguay's worst political crisis in more than a decade.

Former president placed under house arrest
Peña was ordered to remain at one of his residences in Asunción until appearing before prosecutors on Saturday morning. He faces allegations including breach of trust, influence peddling and abuse of public office for personal benefit, offences that carry maximum prison sentences of up to 10 years.

Lawmakers accused him of exploiting his political influence to channel hundreds of millions of dollars in public funds into Ueno Bank while regulators allegedly ignored questionable lending practices involving affiliated businesses.

Peña has denied any wrongdoing.

Police surrounded his residence on Friday night as protesters gathered outside, waving national flags and pledging to maintain a vigil until morning to ensure he did not flee.

Prosecutors also ordered the arrest of Carlos Carvallo, who previously headed the financial company that later became Ueno before Peña appointed him governor of the central bank in 2023. It was not immediately known whether Carvallo had been detained.

Vice President Pedro Alliana was sworn in as the new president on Friday to complete the remaining presidential term, which runs until August 2028.

"The Paraguay we receive today has urgent needs," Alliana said. He is also under investigation over his alleged connections to the bank and now faces the challenge of restoring depositors' funds and holding those responsible for the collapse accountable.

In a farewell message issued before the Senate verdict, Peña said he did not want his continued presence in office to deepen divisions or create further instability.

"I say goodbye with gratitude, without ignoring the anguish of those who are waiting for answers today," he wrote.

Public anger has intensified as the crisis has unfolded. While senators debated Peña's impeachment on Friday, protesters demanding the return of their frozen deposits and accountability for the bank's collapse marched through downtown Asunción.

They chanted, "Santi Peña to Tacumbú!" referring to the capital's main prison, where Ueno founder and former chief executive Miguel Vázquez is currently being held.

"This was an enormous betrayal of trust," said Yinal López, an employee of the state electricity company whose pension fund also had deposits in Ueno.

"The president has made a mockery of the people," he added.

Frozen accounts fuel public anger
Following the regulatory takeover, Ueno customers lost access to their accounts and were unable to withdraw cash, use their savings or make purchases with their bank cards.

The digital bank had attracted large numbers of low-income and previously unbanked customers through attractive supermarket cashback offers. According to the bank, more than one million Paraguayans opened their first-ever bank accounts with Ueno.

Even members of Paraguay's national football team, which was sponsored by the bank during its campaign leading to a historic World Cup victory over Germany this year, reportedly cannot access their funds.

The consequences of the collapse have extended beyond individual depositors. A ride-hailing platform dependent on Ueno's banking services has shut down, leaving around 3,000 drivers unemployed.

Meanwhile, the state-owned electricity company said $21 million in loans from the Inter-American Development Bank and Taiwan, intended to finance public infrastructure projects, had become inaccessible because the funds were held at the bank.

Paraguayan government bonds have suffered some of the steepest losses among emerging markets this week, while the country's currency, the guaraní, has weakened against the US dollar.

Some customers began receiving access to their deposits on Thursday, starting with account holders whose savings did not exceed 10 million guaraníes, equivalent to approximately $1,500.

Deposits are insured up to around $35,000, a limit that the central bank says covers 97 per cent of Ueno's customers. The regulator has described the bank's failure as an isolated incident and maintained that the country's wider financial system remains stable.

In a separate investigation into Ueno's management, prosecutors have brought charges against 27 individuals, including founder Miguel Vázquez, over alleged offences such as breach of trust and attempted fraud.

A court has ordered six former directors, including Vázquez, to remain in pretrial detention, while two others have been placed under house arrest with electronic monitoring.

Authorities have also confiscated luxury vehicles, a yacht and two small aircraft reportedly linked to Vázquez.

A bank built on public funds
Ueno expanded rapidly from a relatively unknown financial institution to one of Paraguay's largest banks in terms of deposits within just a few years, receiving a major boost from more than $800 million in public funds.

The bank attracted more than two-thirds of the country's adult population as customers, with its prominent branding appearing across the country, from the national football stadium to the bank cards used by street vendors.

The impeachment charges against Peña highlighted his previous financial interest in Ueno's holding company, which he gave up under pressure last year, as well as his decision to appoint Carvallo to lead the central bank responsible for regulating the institution.

Lawmakers also accused Peña of allowing the state pension fund to deposit $355 million in Ueno, exceeding the legal limits.

Analysts believe Peña's political and institutional connections helped protect the bank from proper regulatory scrutiny despite growing concerns about its financial condition.

"Under Peña, the central bank began to lose credibility, lose neutrality and then relax all its control mechanisms to favor the business group that had Ueno Bank as one of its pillars," said José Tomás Sánchez, a political theory professor at the National University of Asunción.

Peña continued defending the bank until only a few weeks before its collapse. Last month, he told reporters that an ongoing regulatory investigation did not necessarily mean Ueno would be shut down and accused the media of creating unnecessary public panic.

Bank collapse triggers political downfall
Peña's dramatic fall from power came within days, taking him from a celebrated ally of Washington who met US Treasury Secretary Scott Bessent in late October to a former president confined to his residence.

Regulators took control of Ueno before dawn on Tuesday. By Thursday afternoon, Peña had offered to resign as members of his conservative Colorado Party turned against him, led by former president Horacio Cartes, the party's leader and Peña's longtime political mentor.

By Friday, however, Peña had been placed under arrest following his impeachment, which stripped him of the immunity he would have retained had the Senate accepted his resignation.

A former International Monetary Fund economist, Peña owed much of his political rise to Cartes, a tobacco magnate who appointed him finance minister and backed his presidential ambitions twice.

After taking office, however, Peña reportedly sought to establish an independent political power base rather than remain under Cartes' influence. Analysts say Ueno, backed by substantial public funds, became a central part of that effort.

"It's like a Shakespearean drama. He tried to displace his mentor, his political patron," said Miguel Carter, director of DEMOS, a Paraguayan research centre.

"But he did so on very fragile grounds," he added.

Cartes eventually moved against his former protégé. In September, senators loyal to him began publicly questioning the central bank over Ueno's risky lending to companies connected to the bank.

When Ueno collapsed this week, Peña's political influence also crumbled. Cartes, who was previously sanctioned by the US Treasury over alleged corruption, publicly called for Peña's removal from office.

"Cartes put the nail in the coffin," said Andrew Nickson, a Paraguay expert at the University of Birmingham.

"Peña had no political base to rely on, and he was left high and dry," he added.