By Daniela Desantis and Lucinda Elliott
ASUNCION, Nov 6 (Reuters) - Paraguay's Senate launched an extraordinary meeting as part of impeachment proceedings against President Santiago Peña on Friday, deepening uncertainty over the country's leadership after he resigned in connection with the collapse of a local bank.
Peña submitted his resignation on Thursday following the collapse of ueno, to which he had former business links. His resignation has yet to be formally accepted, leaving the country in political limbo while impeachment proceedings continue.
Vice President Pedro Alliana, set to take top office in Peña's place, had not yet been sworn in by early Friday.
Peña's legal team had requested a 72-hour extension to present his defence, which the Senate rejected. The president will be notified that he has been summoned to appear before the Senate on Friday.
On Thursday evening, lawmakers acting as prosecutors formally filed the charges supporting Peña's impeachment. Opposition legislators have argued that any final vote must respect the president's right to a defense before proceedings move forward.
The impeachment charges allege that Peña committed conflicts of interest, manipulated regulatory oversight, diverted pension funds and participated in an institutional cover-up involving the central bank.
FROZEN ACCESS TO FUNDS
The political crisis has spilled onto the streets, with demonstrators returning to downtown Asuncion on Thursday night demanding accountability for ueno's collapse and faster compensation for depositors whose savings remain frozen.
Some account holders began recovering their money on Thursday night.
Prospects for a lengthy political transition have also drawn attention from investors and neighboring Brazil, Paraguay's largest economic partner. While regulators have sought to reassure markets by guaranteeing most deposits and containing risks to the wider financial system, investors are watching whether the political turmoil undermines confidence in Paraguay's institutions.
"Protests over frozen savings will intensify if Peña's exit appears to grant him impunity or if payouts to depositors and pensioners stall," said Mariano Machado, Americas principal analyst at Verisk Maplecroft.
A Brazilian government source told Reuters that Brazil's immediate concern was avoiding social instability in Paraguay and ensuring the banking crisis is resolved without triggering wider unrest.
An impeachment conviction would prevent Peña from becoming a senator for life, stripping him of parliamentary immunity and potentially exposing him to criminal investigations related to the banking scandal. Prosecutors have already opened criminal cases against Peña in connection with ueno.
The turmoil began earlier this week after Paraguay's central bank intervened in ueno, saying the fast-growing digital bank had breached minimum solvency requirements. The fallout has already forced out the central bank chief and led to arrest warrants for eight ueno executives.
Officials said ueno's top executives were transferred on Friday to one of Paraguay's main prisons for detainees awaiting trial.
(Reporting by Daniela Desantis in Asuncion and Lucinda Elliott in Montevideo; Adittional reporting by Aida Pelaez-Fernandez, Ricardo Brito in Brasilia; Editing by Nia Williams)
