Home / Opinion / Views /  Alternative currencies on the rise: Can Sur from Brazil, Argentina challenge dollar’s status?

The Presidents of Brazil and Argentina announced this week at a regional summit of 33 Caribbean and Latin American nations in Buenos Aires that they have plans to float a common currency. They also invited other South American countries to join the initiative aimed at circumventing the dollar’s dominance, reducing the dependence of the regional trade on the dollar for settlements to “reduce external vulnerabilities".

If successful, and that’s a big ‘if’, such a currency union would represent about 5% of global GDP, or what could be the world’s second-largest currency bloc, smaller than the world’s largest currency union, the euro, that covers 14% of global GDP.

Sur is not intended as a replacement for Brazil’s real and Argentinian peso. Instead, it is planned as a parallel currency for settling trade in non-dollar terms.

The reasoning is simple, perhaps even an oversimplification. Argentina, a country going through a severe economic crisis, has a severe shortfall of dollars, making it difficult to pay for imports. A big chunk of its trade is with Brazil. And so, the two countries want to see if they can settle trade in a currency other than dollars.

Argentina has been in recurring macroeconomic crises, its foreign exchange reserves are running low, leaving it with no dollars to pay for imports, hampering trade with Brazil. The countries hope that a common currency, which they propose to call sur or south, will help settle trade between them.

A common currency has been talked about now for nearly 32 years, since 1999, when the Mercosur trade bloc was launched. One of the reasons it has not taken off so far is the failure to bring on board Brazil’s central bank, which has been opposed to the idea.

Creating common currencies is a tedious and time-consuming affair. It rests on thrashing out monetary and fiscal unions and integrations while accounting for differences in the size of the economies party to the union and coordination among their central banks. A great deal of work goes into computing the exchange rates and other such details. The euro took 35 years, and the European Union has still not managed to complete the process of creating a fiscal union.

The greatest buy-in for the plan is naturally from Argentina, an economy hit by a sovereign debt crisis and annual inflation of nearly 100%, its central bank’s currency printing presses running amok to finance the government’s spending as a result of which the quantum of money in circulation in that economy quadrupled over the last three years, according to official data. The Ukraine war has only added to its economic troubles.

The currencies of the two countries trade at an exchange rate of 35 Argentinian pesos to 1 Brazilian real. Brazil’s real-to-dollar exchange rate is just under 20 cents. A common currency could, therefore, make sense if the hurdles can somehow be overcome.

International lenders have stayed away from lending to Argentina after it defaulted — for the ninth time—on its International Monetary Fund, IMF, in 2020. The country owes more than $40 billion to the IMF from a 2018 bailout. Shifting trade settlements to the new currency that will enjoy a superior exchange rate than the peso, the country would hope, will help it circumvent, to an extent, the loss of purchasing power of its own currency owing to the chronic and recurring macroeconomic troubles.

However, the Argentinian macroeconomic troubles are also the biggest reason the proposed Latin American common currency seems like a non-starter. Fiscal stability and debt credibility are necessary for a functional and stable currency integration. Runaway deficits, debt defaults and fiscal profligacy are not conducive to creating a common currency.

The World Bank projects Brazil’s economy to slip into a deep slowdown, its GDP growth slipping to less than a percent in 2023 from 3% in 2022. It is still not as weak as Argentina’s. Brazil’s central bank has managed to ensure that inflation is running under 6%. How will Brazil and Argentina coordinate their fiscal and monetary policies?

Remember the sovereign debt crisis in Europe after the 2009 global financial crisis compounded the homemade problems in Greece (fudging and hiding of fiscal deficits by the government)? German taxpayers had to help Greece, and even then, its economy went through a contraction, with the country having no independence to adjust the exchange rate or interest rates to the specific conditions in the Greek economy, resulting finally in governments falling.

Many other countries are responding in a way somewhat similar to the Latin Americans, clearly hit indirectly and alarmed by the sanctions imposed by Western countries against Russia after the Ukraine war, the freezing of its stockpile of foreign currency reserves, and barring it from the SWIFT international payment settlements.

Many countries have revived past plans of settling trade in currencies other than the dollar. Russia and China have been using agreements in place since 2015 to settle trade in yuan. China is also propping up the petroyuan that Mint SnapView wrote about recently. India is trying to settle more and more trade in rupees.

Politics become conducive for such moves when many countries, as currently is the case, are at risk of insolvency, their cost of servicing international debt rising, and their imports becoming more expensive because the dollar is gaining strength on the back of the US Federal Reserve raising its interest rates to quell decades high inflation. Sri Lanka defaulted last year for the first time in its history. Pakistan is struggling to keep its IMF lifeline alive, with barely three weeks of foreign exchange reserves left with its central bank.

The question on everyone’s minds, therefore, is, as a Bloomberg columnist put it, how does a country preserve its sovereignty without having control over the currency it borrows and trades in?

But the economics of coming up with alternative currencies to address this problem simply doesn’t work out; none of the moves poses an immediate risk to the dollar’s hegemony in global finance and trade and its status as the preferred reserve currency. No currency and monetary authority in the world can as yet match its reach, convertibility and credibility.

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