Brazil, Argentina Consider Forming Common Currency
By Charles Penty
Brasilia, May 5 (Bloomberg) -- Brazil and Argentina agreed to consider creating a common currency to help bolster mutual trade following devaluations in South America's two largest countries.
The nations will set up a ``monetary institute'' to propose steps for integrating their currency systems, the governments said in a joint statement during a visit by Argentine Vice Foreign Minister Martin Redrado to Brazil's capital, Brasilia.
Brazil, which in the past has resisted overtures from Argentina to create one currency, may be more inclined after a 70 percent drop in Argentina's peso last year curbed Brazilian exports, some economists said. Argentina, which depends on Brazil as the main buyer of its exports, is betting that President Luiz Inacio Lula da Silva, who took office Jan. 1, will cooperate on the plan with a new president to be elected this month in Argentina. Brazil's currency has dropped by 21 percent in the past year.
``It's the first time you're seeing the right conditions for them to think about it,'' said Guillermo Estebanez, a currency strategist at Banc of America Securities in San Francisco. ``The political and economic environment allows something that has been mulled over for awhile to be an objective.''
Regional Trade
Brazil and Argentina are the largest partners in a regional trade group that includes Uruguay and Paraguay. Brazil's exports to Argentina fell by about half last year to $2.3 billion after Argentina devalued its currency in January. Brazil says it imported from Argentina about $4.75 billion worth of goods, down from $6.2 billion in 2001.
Both countries' currencies have rallied this year, with the peso climbing 22 percent against the dollar and the Brazilian real gaining 16.5 percent. The peso rose 1.7 percent today to 2.75 per dollar while the real dropped 2.3 percent to 3.0375.
Forming a common currency ``appears as a simple solution, but it basically focuses on the wrong issue,'' said Enrique Mantilla, president of Argentina's Chamber of Exporters. ``What Argentina and Brazil need to do to reduce the volatility in their currencies is implement sound fiscal and monetary programs.''
Throughout the 1990s, Argentina fixed its currency one-to-one with the dollar, a system that hurt the country's exporters when Brazil devalued its currency in 1999. Two years later, Argentina defaulted on its debt then gave up the U.S. dollar link.
Brazil and Argentina might consider adopting a ``secondary'' currency for use in trade and tourism transactions between the two countries, the Globo newswire reported, citing Redrado. Another alternative would be to set trading bands to serve as a reference for trade between the two countries, Globo citing him as saying.
A common currency is ``an idea but we are very long way from any possibility of it becoming reality,'' said Odair Abate, chief economist at Lloyds TSB Group Plc's Brazilian unit in Sao Paulo.
quote.bloomberg.com |
