Today begins a new era in relations between Argentina and Brazil, a deep bond that will last for decades.
My love @LulaOficial, this is your house. Latin America dreamed of your return and today it hugs you again ♥️ pic.twitter.com/MF6wEVcELS
– Alberto Fernandez (@alferdez)
January 23, 2023
The plan
In a joint letter, the new Brazilian president, Luiz Inacio Lula da Silvaand the Argentine leader, Alberto Fernandezsaid they wanted to “create a South American circulation coin in the long term” to be used for financial and trade flows.
That prompted talk of a Eurozone-style regional currency for South America, though officials have since downplayed that and analysts say a full currency union is a distant prospect.
Since then, Lula has said that the first talks focus on developing a shared unit of value for bilateral trade in order to reduce dependence on the US dollar.
The executive secretary of Brazil’s Finance Ministry, Gabriel Galipolo, told Reuters that the “regional accounting unit” would come along with expanded credit to support exports to Argentina through banks operating in the country.
He added that Brazil’s government would offer guarantees to banks that helped provide financing, while Argentina, a major grain exporter, would have to provide guarantees through tangible assets such as grain, gas or oil.
I’m surprised by the idea of a common currency for Brazil & Argentina. This seems highly problematic given the differences in the economies, histories of problematic populism in both places, relatively thin political connection btw them & both countries problems w fixed exchange rates
—Lawrence H. Summers (@LHSummers)
January 23, 2023
A Euro-South American?
Under the plan, the Brazilian real and Argentine peso would continue to exist, with the new currency aimed strictly at trade. That is very different from the euro, which is used for all kinds of transactions within the European bloc.
The currency would be used in clearinghouses to execute trade payments between the two countries, which would partly help reduce dependence on the dollar. That’s key for Argentina, which is grappling with low foreign exchange reserves after years of debt crises.
“This currency would not circulate within Brazil or Argentina. It is specifically to be a common denominator of commercial exchanges,” said Fabio Terra, professor of Economics at ABC Federal University.
What would it be worth?
How the new currency would be valued is still up for debate, but the Brazilian government is considering stablecoins as a possible benchmark, Galipolo told Reuters.
Digital stablecoins, pegged to an asset like gold, or major currencies like the euro, pound, and US dollar, have emerged as issuers seek to expand the uses of digital currencies, which are typically unregulated and volatile
“It is obvious that the real will have the greatest weight in the equation because it is the most liquid currency we have in the international market,” Galipolo said.
Is the plan new?
In the late 1980s, Brazil and Argentina discussed the idea of a shared currency for trade called the ‘gaucho’, which fell by the wayside due to difficulties in implementing the idea. In 2019, former Brazilian President Jair Bolsonaro touted plans for a currency union, which also failed to materialize.
However, Brazil’s government economic team now believes that a combined trade-focused currency and bolstered financing could help the South American country regain trade with Argentina that it has lost to China in recent years.
With information from Reuters
