New Currency to Be Introduced : Argentina Extends Bank Holiday
The Argentine government extended a national bank holiday Monday and sent hundreds of price inspectors into shops to implement a Draconian economic reform aimed at curbing runaway inflation.
There was some confusion about the reform--Monday was the first business day since its announcement last Friday--but, except for financial institutions, Buenos Aires seemed to be functioning normally.
The bank holiday will continue today to allow financial institutions to prepare for resumed operations Wednesday with a new currency. The new unit of currency, the austral, which means “southern,” replaces the traditional Argentine peso. A thousand pesos becomes 1 austral, though peso notes will remain in circulation as legal tender.
The government of President Raul Alfonsin decreed the currency reform as part of an unexpectedly severe “battle plan” against an inflation rate that had reached 1,000% projected over the year.
Reduction of the government deficit by making state enterprises pay their own way, and a government promise not to print more money, are key ingredients in the reform. So are wage and price controls, which went into effect Monday.
Man-in-the-street interviews by Argentine radio and television stations indicated that the response was mostly positive. Powerful labor unions angrily attacked the government for what it called “dictatorial” action but made no direct move against it.
Mario Brodersohn, Argentina’s chief negotiator with the International Monetary Fund and the foreign banks that are owed nearly $48 billion, said: “With the country in hyper-inflation, there was no other alternative. It is a good plan. What is essential now is public confidence.”
A strong government advertising campaign to win support for the reform carried the optimistic message: “Now your money is worth something.” Argentines were also advised to restrict their buying until official price lists are distributed today.
The Commerce Secretariat said that about 400 government price inspectors, most of them university students of economics, began patrolling shops in Buenos Aires. Consumers were urged to report incidents of price gouging. Special telephone lines for complaints were busy most of the day.
The price freeze requires that all goods be sold at levels in effect last Wednesday, but there were widespread reports of merchants who spent the weekend raising prices. The government threatens stiff penalties against price violators.
By the time shops opened Monday morning, nearly all had observed the demise of the peso with fresh signs quoting costs in australes.
With inflation slashed overnight to a theoretical zero, the government said one austral would be worth $1.25. Officials hope to hold it at that level, in contrast to the peso, which lost value daily against the dollar as inflation mounted.
The reform did not lift exchange controls, and the central bank will not sell dollars for australes any more than it did for pesos. This means that a parallel market, with an exchange rate above the official rate, is likely to be born as soon as banks reopen.
The new policy represents a 180-degree turn for Alfonsin, who had vowed that efforts to control inflation while repaying foreign creditors would not include policies that promoted recession or a decline in real income.
Both are now likely, but Alfonsin supporters like Brodersohn, one of the authors of the reform, insist that the worsening crisis demanded shock treatment.
“It became clear that gradualism was not working,” Brodersohn said in an interview.
After taking office in December, 1983, the Alfonsin government indexed wages and rates for public services, tying them to the rate of inflation. That, added to the government’s resort to the printing press to finance its deficit operations, fueled the inflation.
In the past three months, Brodersohn said, public utility rates have been raised to levels that enable state enterprises ranging from the telephone and oil companies to the national airline and steamship line to pay as they go.
The government will not say how long it intends to maintain the shock treatment, which goes far beyond traditional austerity of the sort that the IMF favors and Alfonsin long resisted. The Argentine president, a center-left democrat whose Radical Party has populist roots, had long argued that austerity could undermine a fragile young democracy.