In theory, Juan Vital Sourrouille and his team argued that the fiscal deficit (that the government of Raúl Alfonsín inherited about 12% … and a default) and the monetary issue they were the main cause of inflation. But that before it was necessary to deactivate a mechanism by which inflation fed back into the short term and it was the expectations.
The success of the plans Gomez Morales (1952), by Gelbard (1973) and by Krieger Vasena (1967), were evidence that those operations at some point in time had worked. Another issue is that they had not lasted. Precisely one of the aspects of Austral was correct the error of the Gelbard plan that it had applied a more expansive fiscal policy.
Juan Sourrouille’s economic team, while negotiating and closing the details of the aid with the US Treasury and the IMF, was applying corrective measures that were, basically, price increases and austerity in public accounts. Raúl Alfonsín came out to the balcony of La Rosada to talk about “War economy”.
Before the Austral was announced, the dollar, public rates and meat were increased. Inflation accelerated. If inflation in May was 30% in June it would go up 40% per month.
On June 14, 1985 (Friday) the Economic Reform program was announced, immediately christened the Austral Plan. The austral was the new currency that traded at a fixed exchange rate of 80 austral cents per dollar.. It was announced that the BCRA stopped financially assisting the Treasury. The goal of the fiscal deficit fell to 2.5% of GDP and was financed by the IMF and the markets. A table was created (job of Daniel Heymann, today advisor to Martín Guzmán) that made it possible to deflate the contracts that had incorporated an increase in future payments, now on a downward path according to disinflation. That way, someone who had taken on future-indexed debt would avoid having to pay more and would eventually run a risk of bankruptcy. “It is probably one of the boldest and toughest programs to have ruled in the West since the Second War,” Ambito Financiero had anticipated on Thursday, June 13.
The Austral plan was born from a support that Ronald Reagan provided the government of Raúl Alfonsín, within the framework of the former president’s tour in 1985. Argentina was one of the few democracies of the world. But also their default was a problem for Wall Street banks. At that time, sovereign debt had not been atomized as it would happen years later with the Baker Plan, and Argentine securities were held by large entities instead of individual investors and holders. Argentina, together with Mexico and Brazil, were the main debtors of Citibank, JP Morgan, Salomon Brothers and other giants. They almost represented (these three countries), 89% of the total debt. Washington supported Argentina. It was the democracy of the region and Alfonsín had managed to tell a story. “The interest in helping Argentina was to achieve a stable democracy”Volcker recounted years later.
Paul Volcker, president of the Federal Reserve in the 1980s with Ronald Reagan, was key in helping Austral. It was to him that Sourrouille first spoke (and to the Secretary of the Treasury) about the idea of a program that would advance price increases, establish a drain and calibrate the rest of the prices. The Monetary Fund, Jacques De Larrosiere, was the director, he opposed first and then gave the green light.
All the accounts that the economic team had made for April-May 1985 began to get old quickly when in July of that year Volcker raised rates every month through December. The dollar began to appreciate globally and commodities to fall. The corn (the main crop at the time), fell 25% in one year. A fatal collapse for that economy.
Washington had given Argentina some US $ 3 billion to start the Austral.
Sourrouille went to see Volcker.
– I have difficulties with your policies and the plan that we launched.
– What do we do?
– Splash in the mud, you have to navigate.
Consulted on that dialogue several years later, Volcker would say about Sourrouille. “He was a first-class economist and a brave man to do that.”. In less than ten months the Austral plan began to be unrecognizable.