The governments of Brazil and Argentina are expected to announce next week preparations to launch a common currency project that might turn the two countries, the two largest South American economies, into the world’s second largest currency bloc.
Argentina y Brazil plan to advance in the discussions on a common South American currency in the visit of the Brazilian president, Luiz Inácio Lula da Silva, to Buenos Aires, as confirmed by the Argentine government on Sunday, although officials and analysts do not expect it to be implemented in the short term.
“We decided to advance in the discussions on a common South American currency that can be used for both financial and commercial flows, reducing operating costs and reducing our external vulnerability”, indicates a statement from the Government of Alberto Fernández, on the occasion of the visit of Lula da Silva.
“We intend to overcome the barriers to our exchanges, simplify and modernize the rules and encourage the use of local currencies,” he adds as one of the agreements to relaunch the strategic alliance between both countries.
The plan – which will be discussed during the visit of Lula, who arrived in Argentina this Sunday and will meet with his counterpart on Monday to sign a series of agreements on different topics – includes the possibility of the common currency being extended to other countries, according to official sources.
“There will be… a decision to start studying the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” Argentina’s Economy Minister Sergio Massa told the newspaper. Financial Times, as published this Sunday.
As the minister added, “it would be a study of trade integration mechanisms,” although he noted that he did not want to “create false expectations” because “It is the first step of a long road that Latin America must travel.”
Announcement soon?
“We will announce the decision to start studying the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” announced the Argentine Economy Minister, Sergio Massa, to Financial Times.
“I do not want to create false expectations: it is the first step in a long road that Latin America must travel,” added the minister, who assured that Argentina and Brazil will invite other countries in the region to join this project, before recalling that Europe took 35 years to create the euro.
Brazil and Argentina have been discussing a common currency for years, but the talks have never come to fruition due to opposition from the Central Bank of Brazil. Under the government of the left in both countries, experts understand, in relation to Lula and the Argentine president, Alberto Fernández, there is greater political support for the project.
Long term
“None of what he says are short-term measures,” the director of the Abeceb consulting firm and Minister of Production during the Mauricio Macri administration (2015-2019), Dante Sica, told EFE.
Sica recalled that during that mandate progress had been made on a letter of intent between the two countries to begin studying the possibility of having a common currency through a program with the Inter-American Development Bank, and that it was the Brazilian central bank that stopped the initiative. .
According to Sica, “the resistance of the central bank of Brazil is strong” because Argentina has an inflation of 94.8% in 2022 and the private ones project 98.4% in 2023, according to the expectations surveyed by the Argentine Central Bank, and “It does not have a consistent program to lower long-term inflation.”
“The currency as a whole is built with a high level of confidence, established macroeconomic policies, and similar inflation ranges,” added Sica, since inflation of 4.8% is projected in Brazil in 2023.
Alternatives
As an intermediate path, Sica indicated that a currency swap might be enabled, which both Administrations have been negotiating since last year. In this way, instead of doing a daily balance to see which country puts up the dollars to liquidate exports, it would be done every six months.
“That is financing, it is not a single currency,” Sica clarified, so both countries must agree on an interest rate.
In the same sense, the general director of DNI Consultores, Marcelo Elizondo, explained to EFE that Massa’s team is talking regarding a common currency project for commercial exchanges between companies from the two countries.
“It is a currency in which the peso and the real would be quoted and that would be used to pay for the transactions of the companies of the two countries so as not to depend on the dollar,” Elizondo explained, indicating that this new currency would be like a “nomenclator with conversion to national currencies.
Similarly, Elizondo explained that “it requires the coordination of the two countries and the two central banks,” noting that the Brazilian is autonomous but the Argentine is dependent on the Executive Power.
In addition, transactions between individuals from the two countries would require “an agile response” from the two central banks to cover what was previously done via the dollar, which implies “giving in” to the policy of restrictions on imports and the delivery of goods. currencies to pay for foreign purchases applied by Argentina due to the lack of international reserves.
Brazil is Argentina’s main trading partner, which closed the commercial relationship with the neighboring country with a deficit of 2.25 billion dollars in 2022, although less than the average of 3.5 billion dollars recorded between 2004 and 2018, according to Abeceb.
The return of Lula da Silva to power -following former Brazilian President Jair Bolsonaro (2019-2022) had a bad relationship with the Fernández government- has raised expectations of deepening the bilateral relationship between Argentina and Brazil, but economists highlight the power of Brazilian institutions.
