“Javier, I will set the exchange rate to 10,000 Australis.”
“There will be 10,000.”
The dialogue was between Domingo Cavallo and Javier González Fraga in the first days of February 1991. Erman González had already presented his resignation as Minister of Economy and, after a trip to Venezuela as Chancellor, Cavallo found out he would be the replacement. When he arrived in Ezeiza, there was a car waiting for him to go directly to Olivos for his first meeting as minister. There he met González Fraga and Erman. The two had gone to update him on the situation. González Fraga carried with him a red folder where every day he calculated the convertibility.
The Menem government had applied a strict and orthodox monetary policy throughout 1990 to control inflation. And the Central Bank “sat on the exchange rate”. The dollar grew by 1.7% between February and December of the same year, going from 5,750 Australes to 5,820 in December. Inflation in the same period was 607%. In January the dollar rose to 9,250 Australis flying through the air Erman and González Fraga (In 1990 there were three presidents of the BCRA: Enrique Folcini, Erman and González Fraga. Between March and September 8 billion australes were issued, 40% monthly average).
Cavallo came in and took 45 days to apply 1 peso = 1 dollar. Previously he did the dirty work. There were delayed payments that were made only to show a reduction in government spending. Cavallo, who intended to launch a convertibility, discovered that the Treasury had blocked payments to suppliers, public employees and pensions, and had to resolve all this before launching the 1-for-1.
The minister then ordered Saúl Bouer, Treasury Minister, to cancel all debts in the last days of February.
“I don’t have any money Mingo”Bouer responded.
Roque was Roque Fernández, González Fraga’s replacement at the Central Bank. Bouer gave him a bonus in return.
That same night, and after the BCRA sold 300 million dollars that day in 2 hours, they met in Olivos with Menem and Roque.
Cavallo’s critics at the time accused the minister of having generated an inflationary rush by paying the bills because inflation was falling (it had gone from 15.7% in September 1990 to 4.7% in December and February 1991, before launch 1 to 1). was 27%). The accusation was that Cavallo had caused inflation towards convertibility. But what happened was that the dollar was left behind.
On Saturday, March 16, Cavallo called his two main collaborators, Juan Llach and Horacio Liendo, to ask them to come to his house the following night. “Let’s go to convertibility”he told them over the phone.
The one before convertibility seems to have some records at times similar to the current moment. And if not, see what the book says It can fail: economics and communication in 40 years of democracy, by Andrés Borenstein and Gabriel Llorens Rocha. “If we analyze the previous period, that is, the period between Cavallo’s entry into office in February 1991 and the announcement of the plan seven weeks later,All the economic team’s music was set to fiscal music”.
“And when the monetary aspect was touched upon it was only to say that it was issued to finance the deficit. The monetary issue needs surprise on the one hand, but on the other Without a fiscal anchor there is no monetary policy that can hold”.
The Cavallo plan was launched on Sunday 3 February without talking about convertibility. There was talk of increasing tariffs and taxes.
Menem introduces an argument that Borenstein-Llorens highlights as “communication change”. “Alfonsín came from playing with the Non-Aligned and with what perhaps Argentine society was more accustomed to in geopolitical matters. “Menem breaks with this.” Argentina would support the United States in the Gulf War.
A few days later there is a train strike. Menem fires 200 workers. Weeks later it suspended 13,900.
The President conditions financial aid to the Provinces on the approval of the tax package that Cavallo had sent to Congress. And he receives 500 entrepreneurs: he asks them not to increase prices.
Doesn’t all this sound familiar? Geopolitics, communication, governors, fiscal anchoring…
Fifteen days before the start of convertibility, the Government managed to convene the Senate and obtain approval of the tax package.
The dollar fell to 9,700 Australis. Cavallo announced a minimum value for the exchange rate and by March 19 said he would leave it at 10,000 Australes. Clarion headline “They dollarize the economy: the whole scheme depends on the government not spending more than it takes in. If it does, parity will break and inflation will return.”
Source: Clarin
