Friday, January 27, 2023

Argentina and Brazil to work on design of a common currency

BUENOS AIRES ( Associated Press) — Economic teams from the governments of Argentina and Brazil will work on the design of a common currency for commercial transactions between the two countries, an initiative that has raised doubts over its feasibility.

The currency will initially be shared between Argentina and Brazil and used for trade and transactions between the two countries, Brazilian President Luiz Inacio Lula da Silva told reporters on Monday after a meeting with his colleague Alberto Fernandez.

“We want each economy minister to be able to give us a proposal with his team,” Lula said.

He also indicated that the project would avoid dependence on the dollar and, within this framework, he urged the eventual “creation” of a common currency with the other MERCOSUR countries, the commercial bloc that comprises Argentina and Brazil, along with Paraguay and Uruguay. Let’s make

“I think it’s going to happen and it needs to happen because there are countries that sometimes have difficulties getting dollars,” the Brazilian president said. Latin American States and the Caribbean (CELAC).

Meanwhile, Fernandez admitted that both presidents are unaware of how a common currency could work between the two countries “and in the region … but we know how the economy depends on foreign currencies for trade”. And we know how harmful all this is.”

One of Argentina’s biggest concerns is preventing the recurring liquidation of its level of foreign exchange reserves.

The greenback’s recent strength has made it difficult for developing countries, including Argentina, to service their dollar-denominated debt. Its central bank uses its precious dollar reserves to pay its foreign debt and intervene in the foreign exchange market to prevent depreciation, so it is reluctant to sell greenbacks to importers for trade.

Argentinian Economy Minister Sergio Massa and his Brazilian counterpart Fernando Haddad later said the proposal was not meant to adopt a single currency to replace the real and the peso.

Although Maduro denied his mobilization for Buenos Aires at the last minute, he expressed his intention on Monday to help “consolidate the great homeland,” as now-deceased President Hugo Chávez called Latin America the Caribbean. .

“Today President Lula da Silva and President Alberto Fernandez announced that they are going to take steps to create a common South American currency, I announce that Venezuela is ready and we support the initiative to create a Latin American and Caribbean currency. Freedom, union and liberation of Latin America and the Caribbean!” Maduro spoke in support of the initiative of his Argentine and Brazilian comrades. “There are many things we have to do to move forward.”

The rulers of both countries had already put forward the general lines of the project in a newspaper article published in the Perfil newspaper over the weekend, in which they said they intended to “remove barriers to our exchanges, simplify regulations and and to modernize and encourage. use of local currencies”.

The presidents said, “It was also decided to advance discussions on a common South American currency that can be used for both financial and trade flows, to reduce operating costs and reduce our external vulnerability.” can be done.”

Economists believed that the road to currency adoption would be long and complicated.

Maria Castiglioni Cotter, director of C&T Asesores Económicos, told The Associated Press that what the presidents announced appeared to be “a mechanism to conduct commercial exchanges without the need for the use of foreign currency”; It does not look to replace currencies as was done in the European Union”.

Reflecting on the difficulties, he pointed out that the project needed to “achieve greater trade and movement of capital”, which in Argentina’s case has been made difficult by existing barriers to access foreign exchange markets.

The Economist recognized that having a de facto common currency in Mercosur would result in the bloc having a central bank “that manages a monetary policy, which means that each country leaves its own monetary policy.”

“It is the end of a whole process of institutionalized economic integration that has been going on for a long time,” said Castiglioni, who noted the fact that it would force South American countries to put their economies in order, as did Europe. Happened in. Euro.

Argentina suffers from one of the highest inflation rates in the world – nearly 95% in 2022 – and its peso has been depreciating steadily for more than a decade. The country has several exchange rates, including an illegal exchange rate that Argentines take refuge in to deposit savings.

Brazil is not a beacon of economic stability. It has an inflation rate of about 5.8% in 2022, and the real has lost half its value against the dollar since 2014. The growth outlook for Latin America’s largest country remains weak and it has not posted a surplus primary budget since 2013.

“No country has the initial conditions to succeed and attract others,” Mohamed El-Arian, former chief executive of PIMCO, one of the world’s leading fixed-income investment managers, tweeted on Sunday. “The best this initiative can hope for is that the talks create some political cover for some much needed economic reforms.”

The proposal is not original. Lula’s predecessor, Jair Bolsonaro, said during a visit to Argentina in 2019 that he and then-President Mauricio Macri were taking the first steps to create a “peso-real”. There has been no sign of progress since then.


This note was contributed by Brazilian journalist David Biller

Nation World News Desk
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