Single currency in South America? You can wait seated – 01/23/2023 – Market

South America is unlikely to have a single currency bloc to rival the euro any time soon, analysts said on Monday, despite lively speculation after officials in Brazil and Argentina raised the prospect of a ” shared commercial currency.

President Luiz Inácio Lula da Silva and Argentine President Alberto Fernández said on Monday they were in early talks to establish a shared unit of value for bilateral trade — which does not replace the real or the peso.

The topic has created turmoil in recent days after an article signed by Lula and Fernández spoke of discussions about a common currency for commercial and financial transactions, which was misinterpreted as an idea to create a single currency that would replace national ones.

Analysts were quick to shoot down the expectation, after decades of similar talks without progress, including shelved plans for a “gaucho” call for Argentina-Brazil trade in 1987 and an advocacy by former President Jair Bolsonaro for a currency union in 2019.

“I’m very skeptical that this initiative will see the light of day,” said Alejo Czerwonko, director of investments for emerging markets in the Americas at UBS Global Wealth Management, citing the region’s track record in economic integration. “Failed to achieve integration goals simpler than a single currency.”

A single currency like the euro would need shared political structures and institutions that analysts say would take decades to establish. South American countries have very different economic situations — Argentina, for example, has struggled with inflation for a long time and currently has an annual rate of 95%.

Venezuela — whose President Nicolás Maduro said on Monday his country was prepared to support an initiative like a common currency — is suffering from even greater hyperinflation and economic collapse. Other South American economies, including Uruguay and Chile, have been more stable for a long time.

“It’s been a conversation for many years. I see the benefit for Argentina, but what’s there for Brazil? Let alone Uruguay and Paraguay,” said Eric Farnsworth, vice president of the Council of the Americas and Americas Society.

Farnsworth calls the idea of ​​a currency union a “fantasy”.

Kimberley Sperrfechter, an emerging market economist at Capital Economics, said Lula has other things to focus on, including his economic and fiscal plans. The talk of monetary union was just a distraction, she said.

“Markets are likely to be unimpressed by news of a combined currency, not least because it will take years to implement, if implemented at all,” he said.

Meanwhile, in Argentina, general elections in October could see left-wing Fernández defeated by a resurgent conservative opposition, likely undermining any long-term currency plans with the Lula government.

Todd Martinez, director of Fitch Ratings’ Latin American affairs group, said the two countries appeared unlikely partners to form a successful currency union, given their divergent economies.

Hasnain Malik, head of equity research at Tellimer, agreed, emphasizing that it made even less sense for Brazil — the region’s biggest economy, with a currency that outperformed the dollar last year. Argentina’s peso, on the other hand, fell despite tight exchange controls.

“For Brazil in particular, despite its own policy credibility challenges, nobody knows why it would want to tie itself to a smaller neighbor with such a dubious record of political credibility,” he said in a note.

But some were more optimistic about the long-term potential.

“Latin America’s integration process needs a North Star — and this one is the best possible one, because it would create a bigger single market and better trading conditions with other big blocs,” wrote Pierpaolo Barbieri, head of the Argentine digital payments company Wow, on Twitter.

“It is clear that a monetary union between Brazil and Argentina is unrealistic today.”