A Latin American common currency won’t be easy to get off the ground

Briefly: Brazilian President Luiz Inacio Lula da Silva and Argentine President Alberto Fernandez plan to integrate their countries’ currencies, according to a jointly-written article featured in the Argentine newspaper Perfil.

Their goal is to create a common regional currency. If successful, a Latin American currency bloc would be the second-largest in the world and cover 5% of global GDP.

The benefits: Officials say currency integration would reduce barriers to trade and limit dependence on the US dollar. Plus, their economies already have a framework for integration through their free-trade bloc, Mercosur (including Paraguay and Uruguay).

The risks: Brazil’s economy is relatively stable, with inflation at ~5.8% in December. But you’d be hard-pressed to find someone who wants to lock arms with Argentina’s economy right now. Annual inflation is at ~100%, and lenders aren’t keen on floating credit to a country which recently defaulted on its debt (and still owes the IMF $40B).

Intrigue’s take: Economic power imbalance can be one of the gravest threats to a currency union. For example, structural weakness in Greece’s economy had driven a sovereign debt crisis that nearly took down the Eurozone in 2009 – but that situation pales in comparison to the one in Latin America.

In an exclusive comment to Intrigue, Alejo Czerwonko of UBS said he was “very skeptical this initiative will see the light of day […] Argentina would need to repair the deeply broken trust in its ability to protect the value of any currency it lays its hands on before embarking on common currency projects.”

Also worth noting:

• Regional leaders are in Buenos Aires this week for the annual Community of Latin American and Caribbean States (CELAC) Summit.
• Argentina has started buying back some foreign-held debt in an effort to improve its credit profile, which ratings agency Fitch downgraded to a CCC- in October.