Big Sur? Argentina and Brazil are planning a joint currency.

Of all the countries to buddy-up with to form a new currency, Argentina probably wouldn’t be top of the list. For well over a century, Argentina’s economy has been a story of mismanagement, default, devaluation and false dawns following IMF interventions. Professor Steve Hanke, an expert in inflation and monetary systems, estimates Argentina’s current annual inflation rate to be a staggering 88%.

It may then come as a surprise that during his first visit to Argentina as Brazil’s new President, Luis Ignacio Lula da Silva, raised the possibility of his country and Argentina pursuing a joint trading currency called the ‘Sur’ (or ‘South’). The stated purpose would be to promote bilateral trade rather than seeking a monetary union such as exists in the EU, and would involve state-backed loans from Brazilian banks active in Argentina and Argentina in turn collateralising this borrowing with commodities such as grains or natural gas¹.

One team one dream. But a trading currency is a bit different to a monetary union.

Argentina is a by-word for economic mismanagement, graft, and monetary incompetence. Only a year after miraculously issuing a $2.75b 100-year maturity bond in 2017, Argentina was once again on the receiving end of a $57b IMF bailout. It only narrowly avoided defaulting on this latest IMF loan (one of 22 IMF bailouts for the country) due to a restructuring in 2022². Not exactly as sound as a pound.

If one can set aside Argentina’s chronic and persistent governance issues (which is some task in itself), the logic of a trading currency to promote commerce between Brazil and Argentina has some merits. Argentina is chronically short of US dollars due to its indebtedness and the dollar is the principle currency of global trade financing. Easier trade financing might help Argentina grow its way out of debt by exporting while also freeing up other sources of funding for inward investment, particularly in the resources industry (copper, lithium, silver) where the global energy transition offers the country an excellent opportunity to earn its way back to prosperity through commodity exports.

Trade between Argentina and Brazil was up 21% YoY at $26.4b in the first 11 months of 2022³. In an era of rising commodity prices, Argentina’s luck may be about to change, if only its government doesn’t ruin its prospects once again. Even for the shoddiest economies, a commodity-price boom offers real benefits for those countries blessed with resources. The Soviet Union for example had a ‘good’ 1970s with high oil prices - and then a very ‘bad’ 1980s as oil prices collapsed during the middle of that decade.

Sergio Massa, Argentina’s economy minister, is sanguine about a commodity-exporting revival forming the basis of the country ability to pay off its creditors by 2025. A $5b energy deficit in 2022 will be a $12b surplus by 2025, aided by gas exports to Chile and exports of lithium to satiate the global demand for battery metals⁴. As the Financial Times points out, a key measure of success will be the extent to which Argentinians with investments abroad buy-in to this revival by repatriating funds to invest domestically.

A Sur thing? if it happens, it won’t be like the euro for sure.

As Lula himself said, the monetary plan is at an embryonic stage and is not in any way certain. Were the Sur to be instituted, it would seem logical that it would eventually spread in South America, perhaps first to the Argentinian and Brazilian-led Mercosur regional trace bloc, and then potentially further. For those of a conspiratorial persuasion, the very thought of South America dropping the dollar for trade and going its own way would almost immediately cause hives for some of the denizens of Langley, but that is another story altogether.

One thing is for certain as far as monetary unions go, at least at this stage; the Sur would be no euro. The idea of European monetary union was predicate on nearly a decade of economic convergence, typified by ‘strict’ convergence criteria with respect to deficits, national-debt levels and other measures. After the initial twelve euro members joined the single currency in 1999, those countries’ national central banks lost the ability to set interest rates or conduct open-market operations independently of the ECB. There is no suggestion that the Sur would see such a union between Brazil and Argentina, either initially or at any stage.

The idea of euro convergence was predicate on the economies and economic cycles of the potential member states being sufficiently coordinated and comparable that a single euro-area-wide monetary policy would be suitable. Critics of the euro-project pointed out that the euro itself was a political tool for forced convergence and that if all the European economies were perfectly in sync already (as the convergence criteria demanded), the euro itself would be superfluous. It is arguable that the Eurozone crisis of 2010-12, with the unflattering comparisons between Greece’s donkey economy and Germany’s high-tech one, showed pretty clearly that the sceptics were onto something.

Clearly a trading currency is nothing of the sort, and if the Sur were a version of the euro, the failure of 22 IMF bailouts and a host of other defaults would suggest that Argentina was not a good candidate to be forced into fiscal or monetary discipline by external means. One perhaps has to go back to the older latin monetary union to find a closer parallel to what is being proposed by Lula and friends.

Commodity-backed money to promote trade? Welcome to the latin monetary union

The latin in the latin monetary union had nothing to do with latin America. It was an agreement initially signed by France, Belgium, Switzerland and Italy in 1865 to standardise gold coinage based on the Napoleonic gold franc and to fix a silver-to-gold ratio at 15.5 to 1. Other countries joined later. The aim was to improve international commerce by making the coin of all member countries equally acceptable and interchangeable based on a standardised metallic content.

The system was not perfect. Greece, a later joiner, was kicked out at one stage for debasing its specie, and the Vatican City was another somewhat surprising miscreant and ejectee. The fixed ratio of gold to silver also proved problematic, especially when the US dropped silver as a monetary metal in 1873. This caused silver prices to drop sharply, creating an arbitrage opportunity in the latin monetary union where ‘cheap’ silver could be exchanged for gold at a fixed ratio. This effectively transformed the latin monetary union from a bi-metallic system (gold and silver) into a de facto gold standard.

History lessons and numismatics aside, the aim of the latin monetary union was to promote trade by using a commodity-backed monetary system shared between countries. Given that the UK, as the world’s biggest dog at the time, was a staunch backer of the gold standard, it’s hardly surprising that the latin monetary union ended up mimicking the gold-based international trading system promoted by the Brits.

It is interesting to note that following the monetary disruptions and inflation of the 1970s, international trade in which commodities were exchanged for other commodities (rather than for money in any currency) actually peaked in the mid-1980s. As the era of inflation drew to a close and the ‘great moderation’ took hold, such barter for goods declined and currency reserves and financial assets were once again more commonly accepted as the means of exchange for international trade.

It is probably therefore in this context that the Brazilian and Argentinian proposals should be assessed. There is clearly a growing trust issue with foreign monetary reserves held abroad following the confiscation of Russia’s foreign reserves in March 2022. The explosive purchase levels of gold by central banks in Q3 2022 as reported by the World Gold Council is likely linked to this.

The US dollar is also a growing problem, especially for developing countries. Countries with heavy dollar-denominated debt burdens are finding ‘innovative’ ways around the dollar problem - Ghana using gold to buy oil is a case in point as I pointed out in a recent letter to the Financial Times (FT Link). Part of the stated reason for Argentina’s interest in this new trading currency is its perennial dollar shortage.

Critically, at Davos last week, Saudi Arabia pointed out its growing willingness to accept non-dollar currencies for oil in a move which suggests a major change in the petro-dollar system which has underpinned the dollar as the key means-of-exchange for international trade since at least the mid-1970s. Whether this is about trust in the dollar itself or a realisation that the world’s geopolitical balance is shifting is besides the point.

Rather than some arid and polarising debate about the imminent decline of the dollar, the developments raised in the previous three paragraphs, as well as the moves discussed above relating to the ‘Sur’, should be looked at as symptoms of a changing world order, one which is moving away from globalisation and integration towards regionalisation, national self-interest and potentially autarky.

Likewise, the return of monetary instability, characterised by high and varying rates of inflation and central-bank activism to tame it, may mean countries once again look to pricing their imports and exports not in money but in other commodities. Paying for oil with gold is not an innovative but arguably a highly retrograde step, much as the retreat from a globalised, unipolar world is a similarly decisive step back from the march of economic progress and growth.

The last time the world de-globalised was in the 1930s, and we all know how that ended up. The geopolitical instability of that decade was ushered-in by a period of extreme international monetary instability and change. This is why seeing symptoms such as the ones discussed here is so concerning. The question is when do the symptoms become the disease.

1. Lissandra Paraguassu, Lula floats shared ‘trading currency’ during Argentina trip, Reuters, 23/01/2023.

2. Walter Bianchi, Explainer: Argentina’s new IMF deal pushes default fears down the road, Reuters, 03/04/2022.

3. Michael Stott and Lucinda Elliott, Brazil and Argentina plan currency union, Financial Times, 23/01/2023.

4. Michael Stott and Lucinda Elliott, Argentina confident gas and mineral exports will allow for reduction of debt burden, Financial Times, 25/01/2023.