Joint Brazil-Argentina currency seen as unviable

Implementing a joint currency to boost South American trade, as Brazil and Argentina are considering, will prove difficult.

Brazil’s President Luiz Inácio Lula da Silva and his Argentine counterpart Alberto Fernández said in a statement in newspaper Perfil that both administrations are working on a joint currency that would increase trade by doing away with conversion costs and exchange rate uncertainties. They said it could eventually be adopted by other South American countries.

“We intend to break down the barriers to our exchanges, simplify and modernize rules, and encourage the use of local currencies. We also decided to advance discussions on a common South American currency that can be used for both financial and trade flows, reducing operating costs and our external vulnerability,” they wrote.

The initial market reaction was of disbelief at how two economies at nearly polar opposites could share a currency.

"The creation of a single currency, even with limited use between countries makes one economy absorb the problems and distortions of another economy, since the development of this mechanism makes one country financing another at some point," Reginaldo Galhardo, manager of Brazilian foreign exchange brokerage Treviso Corretora, tells BNamericas.

"There are huge economic differences between Brazil and Argentina, ranging from the volume of forex reserves in Brazil being much larger than Argentina’s to inflation in Argentina being more than 10 times Brazil’s. If we take into account that in Europe implementing the euro took more than 10 years of continuous studies, I find it hard to believe that such a single currency would have room in the short term here in the region." 

Attending the Community of Latin American and Caribbean States summit in Buenos Aires, Lula’s first foreign trip since taking office on January 1 was also meant to mend bilateral ties that were strained during the Jair Bolsonaro administration.

Argentina is a key trading partner for Brazil, importing value-added goods such as vehicles and spare parts; while China, the biggest trade partner, buys commodities.

“Trade with Argentina is very important for Brazil and can be encouraged. However, instead of evaluating the creation of a single currency, it would be more productive for Brazil to study financing mechanisms to fuel trade with Argentina, which can be done easily with trade financing lines from BNDES,” José Augusto de Castro, president of Brazilian export association AEB, tells BNamericas.

According to Castro, Brazilian exports to Argentina reached US$15bn in 2022, compared to US$22bn in 2012.

"We also have to remember that neither the Brazilian real nor the Argentine peso are convertible currencies. China tried to make a single currency with certain Asian countries in the past to promote trade, but it failed to make the initiative viable because the countries did not have convertible currencies," adds De Castro.

Fully convertible currencies can be freely exchanged for gold or other global currencies.