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POPAYAN, Colombia (Reuters) - The lure of easy money was too tempting for thousands of Colombians who lost life savings in pyramid schemes across rural areas already blighted by poverty, rebel violence and cocaine trafficking.
Riots erupted last week in places like Popayan, a colonial-era mountain town in southern Colombia, when bilked depositors stormed the offices of bogus finance agencies whose managers had disappeared with suitcases full of cash.
As companies with such brazen names as "Money, Fast, Easy and in Cash" failed to deliver up to 150 percent in promised interest, the scams exposed the vulnerability of long-neglected rural areas where people shy from opening savings accounts due to high banking costs.
Like the rest of Colombia, with its culture of easy riches that stems from being the world's No. 1 cocaine exporter, people dream of a quick escape from poverty in Popayan.
"I knew there as a huge risk. Who can really expect a 70 percent return?" said Jesus Bravo, 56, a local guitar player who invested and lost 11.8 million pesos ($5,000).
"But the temptation is equally huge when you see your neighbors raking in millions of pesos. My wife was even doing it. She earned 80 percent," he said.
The pyramids grew through last year until exploding in a wave of bankruptcies this month. Victims nationwide range from poor farmers to big-time politicians.
President Alvaro Uribe, who acknowledges he was caught off guard by the scandal, chastised police officers and senators for setting a bad example by investing in the schemes. He appealed to schools to teach children to reject a "Mafia culture" of quick riches and opt for honest work instead.
The popular Uribe's U.S.-backed military offensive has largely kicked Marxist guerrillas out of big cities, bringing huge gains for Colombia's overall stability.
But the rebels, closely connected to the cocaine business, still hold sway over swaths of countryside, polarizing the country between areas with the potential for development and backward zones where subsistence is still the main goal.
Officials are trying to measure losses from the wave of pyramid deals, the impact of which is expected to damage an economy already weighed down by global financial turmoil that started with the U.S. sub-prime mortgage mess.
Popayan's main park has been filled with protesting depositors who blame the government and the media for creating the panic that they say forced the pyramids into bankruptcy.
But that theory is nonsense, according to economics professor Luis Calvo of the local University of Cauca.
"At the heart of the problem is the resistance of people to accept that there is no financial or mathematical reason to believe such high returns are legally possible," he said, his office looking out at Popayan's white colonial buildings.
"Money, Fast, Easy and in Cash" initially lived up to its promises of magical riches, paying dizzying rates. But when its clients could no longer lure their friends to make new deposits to be used to pay off earlier customers, it collapsed.
Now the only ones making money on the deal are the ice cream vendors who have set up stands outside the local offices of the attorney general, where fretful victims line up in the midday heat to file claims against the phony financiers.
"The effect on consumption is absolutely serious," said Freddy Paz, Popayan's secretary of government.
"Businesses are suffering because people have lost their Christmas money. It's going to be a black December," he said.
Uribe says his government will help victims recover millions of dollars in uninsured deposits. He declared a 30-day state of emergency on Monday allowing him to issue decrees to shut down the pyramids and set penalties for the scammers.
Before dawn police surrounded and closed the 59 offices of another finance agency called DMG sparking thousands of clients to take to the streets around the country in protest at the move, which they said left their investments in limbo.
Fifty-two pyramid bosses have been jailed so far.
The situation bears a dark resemblance to the U.S. credit crisis, caused by an overabundance of mortgages sold to people who did not stand a chance of keeping up with payments.
"It's not just us," economics professor Calvo said. "This is also very similar to what's happening in the U.S. economy, where highly questionable mortgages were created and sold one after another, creating the illusion of wealth until people couldn't pay."
Editing by Saul Hudson and Cynthia Osterman