Argentina - Brazil - Payment System in Local Currency

In recent weeks, the governments of Brazil and Argentina have made all the final and necessary adjustments in order to adopt the use of their own currencies in bilateral trade transactions, replacing the U.S. Dollar. While such transactions are scheduled to begin by September 2008, Brazil already implemented the system on June 27, 2008 (Provisional Measure No. 435),[1] and the Argentine government also announced that it is ready for implementation.

This is the second major amendment in the Brazilian Exchange Rate System since 2006, when the country issued a law allowing foreign currency income originated by Brazilian exports to be kept abroad.

This new system will allow Argentine importers to pay in Pesos and Brazilian exporters to receive payment in Reais and vice-versa. The system also allows Central Banks of every country to open lines of credit to cover commercial transactions in their own local currencies.

The protocol of intentions to create the system was executed by the two countries in 2006, during the Meeting of Ministers of Economy and Finance, and the Presidents of the Central Banks of Mercosur and Associated States that took place in Brazilia, but only now did both countries succeed in projecting their systems of monetary compensation, which will be implemented by the Central Banks of Argentina and Brazil. Initially, the system will only be applied for trade of goods.

With the substitution of the U.S. Dollar, which will not be mandatory since the parties will have the option to continue negotiating with the U.S. currency, it is estimated that the total costs of operations will drop by about 2.5% as a result of the elimination of financial conversion costs.

Once the system is tested in a fully operational state, and any inconsistencies are remedied, an expansion of the system to other Mercosur countries will be sought. However, the rest of the associated countries still look at the system with reservations because of the fear of becoming hostages of the Argentine and Brazilian currencies.

This measure represents an additional step towards adopting a common currency in both countries, an objective ever since the signing of the Treaty of Asuncion on March 26, 1991; although at the same time, and despite the fact that transactions between Argentina and Brazil represent 80% of the block’s trade, many believe that it is difficult to implement a common currency, considering it would require the unification of all the member countries’ Central Banks, which today means an unrealistic and utopian measure .

The benefits of the SPLC will be as follows:

(i)          to facilitate financial settlements between both countries;

(ii)          to advance the regional integration process;

(iii)         to reduce financial costs;

(iv)         to increase the liquidity and efficiency of the Peso/Real market;

(v)          to facilitate the process of exports, decreasing bureaucracy and a greater integration of micro and small companies;

(vi)          to reduce the exchange rate risk (as it allows greater prevision and stability); and reduce dependency on U.S. currency.