Argentine President Raul Alfonsin introduced a freeze on wages and prices and a new national currency today in a drastic program of shock treatment for Argentina's ailing economy.
The new economic package, announced by the president and Economy Minister Juan Sourrouille in televised statements tonight, represents the strongest attempt at price stabilization ever adopted by an Argentine government during 15 years of persistent three-digit inflation, officials said.
Diplomats and economists here predicted that the program, which also involves a sharp reduction of living standards, could plunge Argentina quickly into a severe recession and provoke militant opposition from the country's political parties, business officials and powerful unions. Even before tonight's formal announcement, the opposition-led General Confederation of Labor announced a "state of alert and mobilization" and its leaders refused to accept a government invitation to a briefing.
Government officials said the program could be a decisive test of whether Alfonsin can adjust the country to the pressures of paying one of Latin America's largest foreign debts at a time when the ability of the region's governments to successfully stabilize their economies is increasingly in doubt.
Alfonsin said the program was also essential to preserve Argentina's 18-month-old democracy. "Government and the people are initiating an action on which the future of Argentina depends," he said in the text of his speech released this evening. "No one should be confused about what is beginning."
Alfonsin said that a sudden, drastic adjustment of the economy was necessary to prevent inflation from spinning out of control and to restore public confidence. The decision represented a reversal of efforts throughout his 18-month-old government to avoid traditional economic austerity measures or to apply them only gradually.
"At this level of inflation it is impossible to think of gradualism," Alfonsin said. "So a drastic, decisive policy is being imposed . . . . We know it is an extreme measure."
Alfonsin's announcement comes only seven days after his administration announced a new economic agreement with the International Monetary Fund. That accord, which Argentina needed in order to arrange new loans from abroad as well as a refinancing of its $48 billion foreign debt, committed the government to reducing inflation from a monthly rate of nearly 30 percent in May to 8 percent by April of next year.
The text of the IMF agreement, which was released here on Wednesday, called for an increase in taxes and utility rates, cuts in spending, and checks on wages and monetary expansion to control inflation as well as a devaluation of the currency. However, it contained no hint of the more drastic program announced today.
In Washington, only hours before Alfonsin was scheduled to address the nation, the U.S. Treasury announced that it had completed final arrangements for a $483 million loan to Argentina, which desperately needs cash. The United States will contribute $150 million of the loan and 11 other countries -- including Japan, Canada, France, Mexico and Brazil -- will contribute the rest.
U.S. government sources said the United States and the IMF were aware that Alfonsin planned to take a stiffer approach to inflation than was contained in the IMF program, but it was not until reports of the Alfonsin program were leaked to Buenos Aires newspapers Thursday that they became aware of the Draconian nature of the program.
U.S. officials said they felt an international show of support for Alfonsin was important and that the fact that European, Latin American and Asian countries were joining in the temporary loan might help Alfonsin sell the IMF program and now his own even tougher program.
One major effect of the new and wage price measure, economists here said, will be to prevent the government actions from being quickly nullified by spiraling prices. If the freeze on prices can be enforced, utility tariffs and taxes will remain at relatively high real rates, allowing the government to sharply cut its budget deficit.
Under Alfonsin's plan, the rapid expansion of the national money supply, a chief cause of inflation, will be abruptly halted. Economy Minister Sourrouille announced that the Central Bank would no longer print new money to cover the government's bills. That meant, he said, that the government would have to finance its budget only through taxes or borrowing.
The buying power of salaries will decrease by 20 percent or more, experts said, because workers will not be compensated for inflation already accumulated during June. At the same time, the indefinite price freeze will apply from last Wednesday, meaning that large price increases in the past two days will be disallowed. The new currency, the austral, will replace the Argentine peso next week at a rate of 1,000 pesos to the austral, officials said. The switch will be accompanied by the end of indexing of loans, bank accounts, and other financial contracts tied to the high inflation rate.
Officials said the peso will be devalued each day against the new austral, meaning that the peso deposits of Argentines holding bank accounts with fixed monthly interest rates will be worth progressively fewer australs during the next month, a decrease that officials say will be compensated by the abrupt end of inflation. The Central Bank declared a bank holiday today after reports of the economic moves caused a near panic in Argentine financial markets yesterday.