A South American currency union? don't hold your breath

 

South America is unlikely to have a common currency bloc like the European Union, with Brazil and Argentina chattering about a common tender looking increasingly likely

South America is unlikely to have a common currency bloc to rival the euro anytime soon, analysts said on Monday, despite spirited talks by officials in Brazil and Argentina to raise the prospect of a common tender.

Brazilian President Luiz Inacio Lula da Silva and Argentine President Alberto Fernandez on Monday said they are in early talks to establish a common unit of value for bilateral trade, although it will not replace the real or peso currencies.

Leaders spoke on Sunday of a "common South American currency" and officials told the Financial Times that the tender could also be called the "sur" and wanted to eventually be brought to other countries around South America.

After decades of similar talk, including a shelved plan for a so-called "gaucho" for Argentina-Brazil trade in 1987 and former Brazilian President Jair Bolsonaro's foray into a currency union in 2019, analysts were quick to play it down. It was ,

"I am very skeptical that this initiative will be successful," said Alejo Czerwonko, chief investment officer for Emerging Markets Americas at UBS Global Wealth Management, citing the region's poor track record in economic integration.

"It has failed to achieve simpler unification goals than a common currency."

A common tender like the euro would require a shared political framework and institutions, which analysts say would take decades to establish. Countries in South America have vastly different economic conditions – for example, Argentina has long struggled with inflation, and it is currently at an annual rate of 95%.

Venezuela - whose President Nicolás Maduro said on Monday that his country was ready to support initiatives such as a common currency - is facing high inflation as well as an economic collapse. Other South American economies, including Uruguay and Chile, have been more stable over the long term.

"It's been a conversation for many years. I see benefits for Argentina but what's in it for Brazil? Much less than Uruguay and Paraguay," said Eric Farnsworth, vice president of the Council of the Americas and Americas Societies.

He called the idea of a currency union "hypothetical".

Kimberley Sperfecher, emerging markets economist at Capital Economics, said Lula, who is inaugurated this month, had other things to focus on, including his economic and financial plans. The currency union talk was just a distraction, he said.

"Markets are likely to be unimpressed by the news of a combined currency, not least because it will take years to develop, if it is implemented at all," he said.

Meanwhile, in Argentina, center-left Fernández could be toppled by a resurgent conservative opposition in general elections in October, potentially wrecking any long-term currency plans between the two left-wing allies.

Todd Martinez, a director at Fitch Ratings Sovereign Group focused on Latin America, said the two countries appear unlikely partners to form a successful currency union, given their vastly different economies.

Hasnain Malik, head of equity research at Telemir, stressed that this matters even less for Brazil - the region's largest economy, whose currency outperformed the dollar last year. On the other hand, the Argentine peso has depreciated despite tighter currency controls.