Brazil's president, Jose Sarney, today announced sweeping economic changes, including an end to indexation of wages, in an attempt to slow down the nation's rapid inflation.
The program also freezes prices indefinitely and replaces the cruzeiro with a 16th century monetary unit, the cruzado, which will be worth 1,000 cruzeiros, or 7 cents.
Brazil, which owes foreign lenders $103 billion, the largest debt in the Third World, has seen its prices climb 200 percent annually for the past three years. In February, inflation reached a rate of 400 percent annually.
The practice of indexing salaries and certain financial transactions to the monthly consumer-price increase began in the 1970s as a way to stimulate growth. But it has been blamed for the hyperinflation.
"This was a grave and difficult decision which will determine the fortunes of our society in the coming years," Sarney said in a television address announcing the anti-inflation measures. "We have exhausted palliatives and topical treatments.
"We are breaking down the walls of the fortress of inflation, but we still confront old habits. Inflation is part of the life of younger generations, who have known no other economic reality."
Banks remain closed until Monday when the cruzado will be traded at 13.8 to the U.S. dollar. The cruzeiro last traded at 13,750 to the dollar. Existing cruzeiro debts will be devalued progressively against the cruzado so that it can start as a strong currency.
The government expects the program to reduce monthly inflation from 14 percent to 1 percent, but Sarney vowed there would be no accompanying recession.
He requested popular vigilance to maintain the price freeze and said offenders would be imprisoned.
Police already were patrolling supermarkets but there were some reports of prices being raised by those who gained advance warning of the moves.
Salaries will not be frozen, but adjusted in accordance to a sliding scale. Finance Minister Dilson Funaro said a special 8 percent bonus would be paid to maintain gains in living standards for the worst off. "The government guarantees that the purchasing power of salaries will be protected," he said.
Although small savers' accounts will be protected, larger speculative investments will not be sheltered from inflation, and government bonds will pay a fixed rate. Domestic interest rates will float freely, and the government is betting on a huge diversion of resources from speculaton to productive investment.
"Brazilians were exhausted with the terrible effects of inflation. This is a courageous and coherent program which will have the support of all," Funaro said in announcing details of the plan.
Sarney denied that the measures, which have been under study since September, were a copy of the Austral Plan introduced by Argentina in June, or the Israeli "heterodox shock" of July.
The Austral Plan brought Argentina's monthly inflation down from 30 to 2 percent. But the country's gross national product declined, and local interest rates remained high. Argentina has not yet begun to end its freeze.
Israel's plan, accompanied by an 18 percent currency devaluation and major budget cuts, provoked an increase in unemployment, and trade unions eventually forced real-salary gains.
"This is not a recessive plan -- other countries had to make adjustments because of structural problems. Brazil is only carrying out a monetary reform," Funaro said in a televised news conference. He emphasized that the currency was not being devalued.
Despite a generally favorable reaction, former finance minister Francisco Dronelles said it would bring "social, economic and political chaos," and trade unions reacted unfavorably.
Former central bank president Carlos Langoni said that there were no measures, as in Argentina, to prevent the central bank from financing higher deficits or to deter capital flight. But Funaro said capital outflows would be discouraged by high local interest rates and a newly stable currency.
Funaro said that neither the International Monetary Fund nor Brazil's foreign creditors had been informed of the move, but they would favor a decline in inflation.
Foreign bankers said they will watch carefully to see if Brazil controls government spending and monetary creation before deciding whether the anti-inflation plan will work, analysts said.
"The inflation problem is really the federal deficit," United Press International quoted one foreign banker as saying.
A Brazilian negotiating team led by central bank International Deputy Antonio de Padua Seixas has been in New York for the past month negotiating a refinancing plan on about $29.2 billion of the foreign debt.