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New Currency, Wage and Price Freeze Face Test of Public Confidence

June 16, 1985

BUENOS AIRES, Argentina (AP) _ After tinkering with the economy failed to cool runaway inflation of over 1,000 percent annually, President Raul Alfonsin abolished the peso, introduced a new currency and froze wages and prices during the weekend.

The economic medicine, which may be hard for some Argentines to swallow, takes effect this week.

The success of the ambitious overhaul of Argentina’s inflation-riddled economy will hinge on two factors - official resolve and public confidence - say economists and community leaders.

The plan has provoked sharply contrasting reactions, with business leaders and economists cautiously optimistic but labor leaders and opposition politicans virulently condemning it as an attack on workers.

″It’s unarguable that the final key is a real reduction in public spending and the confidence that the new currency awakes in the public,″ Guillermo Alchouron, president of the Rural Society, the country’s influential ranchers’ association, told reporters.

On Friday, Alfonsin announced a wage- and price-freeze and a new national currency, called the ″austral″ to replace the peso. Wages will be increased to adjust to inflation through June but would be frozen beginning July 1.

Socialist Party leader Luis Zamora condemned the government reforms as unworkable. ″The only thing that will be frozen are salaries, because it is impossible to do it to the rest of the prices,″ he said.

Although the currency exchange became effective Saturday, a bank holiday has been declared through Monday to allow the government time to print and deliver australs to banks and exchange houses.

The austral initially will be worth 1,000 pesos, or $1.25. The peso’s value is scheduled to decline daily until it disappears from circulation.

The name ″austral″ means southern, a dual reference to the nation’s location and to the rugged Patagonian frontier in the south of Argentina.

The plan represents an abrupt turnaround from periodic, smaller-scale measures - such as gradually devaluing the peso and slightly curbing wage increases - which the government previously used to combat a 10-year-old inflationary spiral.

Inflation for the 12 months ending May 31 was 1,010 percent - highest in the country’s history.

Alfonsin said the austral will be backed by a government pledge to halt the practice of printing money to cover public expenses - a commitment which implies drastic cuts in government spending.

He also announced an end to indexation - the policy of automatic adjustments in wages and prices to compensate for inflation - and said that wages would be indefinitely frozen after workers receive their June paychecks, which will contain a final 22.9 percent monthly raise.

Prices are to be rolled back to the level of midnight Wednesday and also frozen, effective Sunday.

Labor leaders denounced Alfonsin’s the plan, fearing widespread layoffs of public workers as the government tries to trim spending, and a reduction in the buying power of paychecks.

″The most worrying thing is the unemployment and the salary drop this plan will cause,″ said Juan Zanola, head of the national bank workers’ union.

Jose Manzano, a leader of the labor-based opposition Peronist Party in the House of Deputies, said: ″All the effort they are appealing for from the people is only to pay the debt to foreign usurers.″

Argentina reached an accord Tuesday with the International Monetary Fund to renew a $1.4 billion IMF interim loan needed to make payments on the country’s $48.4 billion debt.

The accord calls for deep cuts in public spending and boosting fees for public services by as much as 50 percent.

Alfonsin campaigned in the city of Cordoba Saturday to seek public support for the reforms. According to local news reports from the city, 500 miles northwest of the capital, Alfonsin said, ″Those who stand to gain the most are the workers, salaried Argentines.

″If it is necessary sanctions will be applied, rest assured, to guarantee prices are kept frozen,″ he said.

Economist Jose Dagnino Pastore described the new program as a″highly positive effort.″

″The goals of the plan are more ambitious in terms of controlling inflation than those in the memorandum of understanding with the (International Monetary) Fund.″

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