Domingo Cavallo - Beginnings in Politics

Beginnings in Politics

His involvement in politics began when he was elected as a student representative at the highest government body of the Economics School (1965–1966). He acted as Undersecretary of Development of the provincial government (1969–1970), Director (1971–1972) and Vice President of the Board (1972–1973) of the provincial Bank and Undersecretary of Interior of the national government.

In July 1982, after the Falklands War fiasco brought more moderate leadership to the military dictatorship, Cavallo was appointed President of the Central Bank. Cavallo inherited the country's most acute financial and economic crisis since 1930 and a particularly heinous Central Bank regulation painfully remembered as the Central Bank Circular 1050. Implemented in April 1980, at the behest of conservative Economy Minister José Alfredo Martínez de Hoz, the policy tied adjustable loan installments (nearly all lending in Argentina is on an adjustable interest basis) to the value of the US Dollar locally. Exchange rates were controlled at the time and therefore raised little concern. The next February, however, the Peso was sharply devalued and continued to plummet for the rest of 1981 and into 1982. Mortgage and business borrowers saw their monthly installments increase over tenfold in just a year and many (including homeowners just months away from paying off their loans), unable to keep up, either lost their entire equity (see, negative amortization) or everything outright.

Cavallo immediately rescinded the hated Circular 1050 and as a result, saved millions of homeowners and small-business owners from financial ruin (as well as millions more, indirectly). What followed, however, remains the subject of great controversy, to this day.

Though nothing new to the economic history of Argentina, he implemented financial policies that may have allowed Argentina's main private enterprises to transfer their debts to the state, transforming their private debt into public obligations. During 1982 and 1983, more than 200 firms (30 economic groups and 106 transnational enterprises) transferred a great part of their 17 billion dollar debt to the federal government, thanks to secured exchange rates on loan installments. There is no clear consensus on Cavallo's role, however, as this fraud took place both before and after his very brief turn at the Central Bank. He inherited this practice from Martínez de Hoz himself (whose chief interest, steelmaker Acindar, had unloaded US$700 million of its debts in this way). Moreover, Cavallo subjected payments covered by these exchange rate guarantees to indexation, and this latter stipulation was dropped by his successor, Julio González del Solar. In either case, the mechanism turning private debt into liabilities of the state continued even after the advent of democracy under Raúl Alfonsín (1983–89) and into the economic crisis that surrounded the Peso's last sharp devaluation in early 2002.

This controversy notwithstanding, upon Argentina's return to democracy in December 1983, he became a close economic advisor to Peronist politician José Manuel de la Sota and was elected as a Peronist deputy for Córdoba Province in the 1987 mid-term polls. Drawing from his Fundación Mediterránea think-tank, he prepared an academic team for taking over the management of the economy, and to that end he participated actively in Carlos Menem's bid to the presidency (1989). President Alfonsín's efforts to control hyperinflation (which reached 200% a month in July 1989) failed, and led to food riots and Alfonsín's resignation.