Brazil and Argentina Plan for a Latin American Common Currency

Two of Latin America’s largest economies Brazil and Argentina with eyes to strength in numbers along the lines of the Euro, plan a common currency to reduce the risk that comes with relying on the US dollar. Both countries have been in a cycle of a financial roller coaster since the Latam financial crisis of the 1970’s. Market crashed continue to pop up in recent years. The hope is it would strengthen trade amongst the group. It would at first run in parallel with the Brazilian real and Argentine peso.

It was reported by the Financial Times on Sunday will announce this week that they are starting preparatory work on a common currency from a summit in Buenos. Brazil has suggested naming the common currency the “sur” (south).

An official announcement is expected during Brazilian president Luiz Inácio Lula da Silva’s visit to Argentina on Sunday night, his first foreign trip since taking power on January 1. On Tuesday the 33-nation Community of Latin American and Caribbean States (CELAC) will bring together the region’s new crop of leftwing leaders for the first time since last year’s election sweep by the left.

Attending will be Colombia’s president Gustavo Petro, Chile’s Gabriel Boric, Venezuela’s Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s president Andrés Manuel López Obrador generally shuns overseas travel and is not scheduled to participate.

“There will be . . . a decision to start studying the parameters needed 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 Financial Times.

“It would be a study of mechanisms for trade integration,” he added. “I don’t want to create any false expectations . . . it’s the first step on a long road which Latin America must travel.”

The common currency is seen as a currency for other Latin American countries. “It is Argentina and Brazil inviting the rest of the region,” the Argentine minister said.

Other Common Currencies

For perspective with the Euro. A Latin America common currency would represent about 5 per cent of global GDP, the FT estimates. The euro takes in around 14 per cent of global GDP when measured in dollar terms.

Other currency blocs include the CFA franc which is used by some African countries and pegged to the euro, and the East Caribbean dollar.

It has been muted many times over the years that the Japanese yen would expand to include other countries. Another common currency often spoken of is the smaller nations in the South Pacific such as Fiji and Papua New Guina using the Australian dollar as a common currency.

The difficulty with a common currency is finding the correct initial pricing. A good example of how it can go wrong was the PIIGS crisis where Portugal, Italy, Ireland, Spain and Greece were all struggling with debt with the Euro. Massa noted that it took Europe 35 years to create the euro, which followed the ECU. So, we are only at the starting blocks here.

Brazil’s central bank has been against previous discussions of a Latam ‘Euro”. With both Argentina and Brazil with some would say, ‘extreme’ leftwing leaders, there is greater political backing.

Brazilian finance minister Fernando Haddad co-authored an article last year, before he took his current job, proposing a south American digital common currency.

Argentina Risks

Trade between Brazil and Argentina reached $26.4bn in the first 11 months of last year, up nearly 21 per cent on the same period in 2021. Both countries are behind the Mercosur regional trade bloc, which includes Paraguay and Uruguay.

“Is the region going to supply this in a way which turns its economy [solely] into a raw material producer or is it going to supply it in a way which creates social justice [by adding value]?,” he said.

Argentina is the country pushing the idea with annual inflation approaching 100 per cent as the central bank prints money to fund spending. This inflation is compared to Brazil’s 5.8%. The FT reports that during President Alberto Fernández’s first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 on the widely used parallel exchange rate.

The obvious risk, and Brazil’s central banks objections is Brazil instead of being bolstered by strength at numbers could be brought down to Argentina’s level. Argentina defaulted in 2020 and still owes over $40 billion to the IMF from a 2018 bailout.

Source: Reuters, Bloomberg

From The TradersCommunity Research Desk