Common currency: Understand what the ‘currency union’ of Brazil and Argentina really means

[ad_1]

Lula’s meeting with the Argentine president brought a debate on the creation of a common currency for commercial transactions. Brazil and Argentina are studying the creation of a common currency. Getty Images Brazil and Argentina sparked disquiet this Sunday (22) with the possibility of a potential “monetary union”, although the two countries are unlikely to abandon the real or the peso anytime soon. So what’s the plan? What did they say? In a joint letter, President Luiz Inácio Lula da Silva and Argentine President Alberto Fernández said they want to “advance discussions on a common South American currency” to be used for financial and commercial flows. That sparked rumors of a European Union-style zonal currency for South America, though officials have since played that down and analysts say a full currency union is a distant prospect. ALSO READ: What is the common currency Brazil and Argentina are negotiating and why this is not the end of the real Lula has since said that the first negotiations are focused on developing a shared unit of value for bilateral trade to reduce dependence of the US dollar. Finance Ministry executive secretary Gabriel Galípolo told Reuters that the “regional accounting unit” will come along with the expansion of credit to support exports to Argentina through banks operating in the country. Galípolo said Brazil’s government would offer guarantees to banks to help provide financing, while Argentina, a major exporter of grains, would have to provide guarantees through tangible assets such as grain, gas or oil. So no South American euro? Under the plan, the Brazilian real and the Argentine peso would continue to exist, with the new currency aimed strictly at trade. This is very different from, say, the euro, which is used for all types of transactions within the European bloc. The new currency would be used in clearinghouses to execute commercial payments between the two countries, helping in part to reduce reliance on the dollar. This is critical for Argentina, which faces low foreign currency reserves after years of debt crises. “This currency would not circulate within Brazil or Argentina. It is specifically meant to be a common denominator in commercial exchanges”, said Fábio Terra, professor of Economics at the Federal University of ABC. What would your value be? How the new currency will be valued is still up for debate, but the Brazilian government is looking at stablecoins as a possible benchmark, Galípolo told Reuters. Digital stablecoins, pegged to an asset such as gold, or major currencies such as the euro, pound and dollar, have emerged as issuers seek to expand the uses of digital currencies, which are often 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 on the international market,” said Galípolo. Has this been tried before? In the late 1980s, Brazil and Argentina even discussed the idea of ​​a common currency for trade called “gaúcho”, which fell into oblivion due to the challenge of implementing the idea. In 2019, former President Jair Bolsonaro released plans for a currency union, which also never materialized. The current Brazilian government’s economic team, however, believes that a trade-focused currency combined with bolstered financing could help the South American country regain the trade with Argentina it has lost to China in recent years.

[ad_2]

Source link