“The weekend joke”. “Crazy”. “I’m surprised it’s taken seriously.” The social networks of economists and market analysts throughout Latin America lit up in amazement this weekend when Financial Times He announced that the governments of Brazil and Argentina want to create a common currency. They didn’t fully believe it until both governments formally announced it, in a joint statement, on Sunday.
“We intend to break down the barriers to our exchanges, simplify and modernize the rules, and encourage the use of local currencies. We decided to advance the discussions on a common South American currency that can be used for both financial and commercial flows, reducing operating costs and reducing our external vulnerability,” says the statement, posted on the Argentine Government page. With two statements, and without offering further details, the announcement has generated skepticism and confusion. Some experts believe that the chances of creating a currency for two such different economies are low. Many more have more questions than opinions.
Argentina has been plunged into an inflationary crisis for more than a decade generated, in large part, by high government spending. Inflation has been exacerbated by the lack of confidence that Argentines have in their own currency, ergo, in their authorities. President Alberto Fernández told a Brazilian media outlet on Sunday that he would like to eradicate “inflationary logic” and the “fascination with the dollar” that afflicts the South American country.
“A large part of Argentine inflation is inflation that economists call self-constructed, which is inflation that is in people’s heads. People see in a newspaper that fuel is going to go up and then it starts to increase just in case,” Fernández said, as shown in a video of the interview in Band News.
A new currency that people can believe in again could bring benefits to Argentina, what is not clear is what Brazil could gain from this agreement. While inflation in Argentina approaches 100%, the Central Bank of Brazil is managed autonomously and independently of the Government and has been one of the most successful in the Latin American region in containing the rise in global inflation. Brazil’s Economy Minister Fernando Haddad downplayed the idea of it being a common currency.
“This is certainly a pretty racy headline this morning,” Todd Martinez, an analyst at credit ratings agency Fitch Ratings, said Monday. “I don’t think we have much to say about it yet because I have a feeling that maybe this proposal has been misinterpreted, it doesn’t seem to us that Argentina and Brazil are looking to adopt a common currency and give up their current currencies, but maybe they are exploring options. for a new currency or accounting unit through which they carry out bilateral trade”.
“If they were to adopt a common currency, this would have all kinds of credit implications. It is not at all clear that these are two economies that have the initial conditions to be forming a successful monetary union, but I do not think that is the idea”, added Martínez.
Even an initiative with a more restrictive scope is unlikely to bear fruit, analysts at consulting firm Eurasia wrote in a report on Monday. “The economic challenges, especially in Argentina, are enormous. Brazil’s economic team will focus on fiscal and tax reform, and Argentina’s presidential election is scheduled for this October. With the opposition poised to prevail, there is little room for ambitious initiatives. Therefore, the announcement is primarily due to the desire of both presidents to signal a commitment to regional integration,” added Eurasia.
It is not trivial, it is not just wanting to have a currency in common and issue it, says the market strategist of the firm Franklin Templeton Luis Gonzali. “Thinking about the particular case of Brazil and Argentina, we can see that they are very different economies,” explains the mathematician. “both are linked to the export of raw materials, but Argentina has not been able to tighten its belt in decades, while Brazil has a more orderly economy.”
“If they really want to put it to the test, they would have to sit down very seriously to talk and that implies not only having economic stability, but also political stability,” says Gonzali, since it would require fiscal and economic commitments from both parties. Agreements that must be respected by governments in the future, regardless of the political party. “They shake hands today and agree on certain measures, but after six or four years a regime change comes and that change comes with very different ideologies and they break with what was agreed, which obviously would destabilize the currency or the path towards a currency. common”, points out Gonzali.
“I don’t think it’s something that can happen overnight,” Gonzali concludes. “It looks very complex to happen.”
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