For common currency with Brazil to advance, Argentina will need to enter with real guarantees

Argentina will need to deliver real assets as collateral in transactions carried out with the common currency with Brazil for the plan to actually get off the ground, according to government interlocutors heard by the Sheet.

The creation of the so-called common currency is part of a strategy by the Luiz Inácio Lula da Silva (PT) government to strengthen trade relations with Argentina, at a time when China is taking over Brazil’s space in the region.

The model under study by the team of the Minister of Finance, Fernando Haddad (PT), foresees that the banks lend to Argentines the reais necessary to pay for imports, eliminating the dollar as an intermediary currency for these transactions.

Haddad’s plan is to use the FGE (Export Guarantee Fund) to unlock lines of credit and finance Argentine importers who want to purchase goods produced in Brazil, but are currently unable due to the shortage of dollars in the neighboring country.

The need for Argentina to deliver real assets would therefore be a counterpart to the Brazilian guarantees, which will be provided through the FGE.

The central point would be to create a trade compensation mechanism between the two countries. It is not, therefore, a matter of launching a currency as such, such as the real or the peso —which would continue to exist independently. This point is highlighted by government interlocutors because, since the idea was launched, the noise around the theme has increased the criticism of the measure.

The Argentine peso has difficulties in accepting it in international commercial transactions, especially in the midst of the inflationary crisis that is plaguing the country and eroding the purchasing power of the local currency.

Exports to Argentines rose 29.3% in 2022, reaching US$ 15.4 billion. The value represents 4.6% of Brazilian foreign sales, which places the country as Brazil’s fourth main trading partner.

According to the model being developed, the banks would make payment directly to the Brazilian exporter, to prevent the Brazilian currency — which is stronger than the peso — from entering Argentina and being exchanged for dollars, deviating from the policy’s objective.

The importer then undertakes to settle the operation with the bank in the future and in reais. In case of default, the guarantees would be activated.

The FGE currently has R$43.4 billion in assets, which, in the government’s assessment, is more than enough to cover transactions —already contemplating a margin to accommodate the risk of further devaluation of the peso. Brazil also has a much more comfortable external position, with more than US$330 billion in international reserves.

But there will also be a collateral from Argentina. As the neighboring country does not have dollars, this guarantee will be given in real assets, such as barrels of oil or other commodities. They will need to be located in locations where enforcement of collateral is clear and certain, possibly in another country.

In a question and answer about the common currency, the Ministry of Finance says that this compensation system between the two countries could, for example, make it possible to export Brazilian cars and fabrics and import Argentine gas and wheat.

“For that, you need a unit of account and a medium of exchange. The common currency will do the clearing [câmara de compensação], the final balance of that trade. If this is done with the dollar, there will always be conditioning to US monetary policy”, says the portfolio.

Negatively received by financial market agents, the proposal is not seen as “necessarily crazy” by Tony Volpon, former director of International Affairs at the Central Bank. The economist points out that Argentina is a potentially large market for Brazil.

“Facilitating and opening up this market for Brazilian exports without taking excessive credit risks, if they are reasonable deadlines with reasonable sizes, it’s even worth it. But we have to remember that many times these things don’t work out, and defaults are frequent”, he says.

He considers that the Brazilian government will take credit risk with a country that has historically had problems honoring its debts. Argentina needed to negotiate an agreement with the IMF (International Monetary Fund) in 2022 to avoid a default on its debts.

For Volpon, the common currency could be a way for Brazil to resume a more friendly relationship with an important partner, but he sees the proposal as a “trick”. “You can transact in your currencies, but what you want at the end of the day is dollars,” he says.

In the agreement signed by the Brazilian delegation in Argentina, the Ministry of Finance foresees that a possible starting point for the common currency could be the SML (Local Currency Payment System), a mechanism created in 2008 and administered by the Central Bank of Brazil in partnership with its peers in Argentina, Uruguay and Paraguay.

The SML focuses on facilitating transactions between Mercosur countries. To serve the common currency with Argentina, however, it alone is not enough and would need to be improved. The document mentions the possibility of “expanding its use and scope, with a view to trade without obstacles and with the inclusion of trade in services”.

Discussions for the development of a channel to facilitate commercial transactions in local currency between Brazil and Argentina began in 2005 and took three years for the project to start operating. The creation of the system was only possible after Camex (Chamber of Foreign Trade) published a resolution, in 2007, authorizing Brazilian exporters of goods and services to receive payments in reais.

The SML allowed, in practice, the carrying out of commercial operations through the local currencies of the Mercosur countries, without having the dollar as an intermediary in these operations – although the compensation between the central banks is made in the American currency.

The person responsible for implementing the system was Maria Celina Arraes, former director of International Affairs at the BC. She explains that the objective of the system was to encourage small exporters, by reducing the cost of the operation, and boosting the trade of small and medium-sized companies abroad, which would not have the conditions or size to operate in the foreign exchange market.

A secondary objective would be to expand the regional integration of Latin American countries, boosting Mercosur. “People used to say that it was the beginning of a possible internationalization of the real”, says Arraes.

According to Henrique Meirelles, BC president at the time, the system facilitated the operationalization of the commercial flow between Brazil and Argentina, mainly due to the shortage of dollars in the neighboring country. “This was settled well because there was a certain commercial balance”, he points out.

Meirelles points out that today there is an imbalance in the balance between the two countries, with a greater volume of Brazilian exports. “This can generate an accumulation of these reserves [futura moeda comum] at the Central Bank of Brazil”, he says. For him, the Brazilian surplus is an obstacle to the success of the model.

Although the SML has facilitated transactions between the economies, its participation in bilateral exchanges remains reduced until today and concentrated on Brazilian exports.

The system in operation by the BC presents a series of limitations, such as the delay in the process and restrictions related to the absence of an exchange contract.