What a ‘common currency’ for Brazil and Argentina really means

The finance ministers of Brazil and Argentina this week signed a collaboration agreement to develop a kind of common value unit for bilateral trading. The idea, said President Luiz Inácio Lula da Silva on his first international trip since his inauguration, is to allow Argentina to finance its imports from Brazil without tapping into its meager U.S. dollar reserves.

Argentina struggles to access dollar-based financing because it faces an array of economic challenges, including low levels of dollar-denominated reserves and an inflation rate of nearly 100 percent.

Earlier on Monday, before Lula’s and Argentinian President Alberto Fernández’s speeches, Brazil’s Finance Minister Fernando Haddad had to play down statements made by its Argentine counterpart, Economy Minister Sergio Massa, to the Financial Times about a “common currency.” 

Having a common currency circulating in both countries is not on the radar, Mr. Haddad told journalists accompanying the trip.

Instead, the new common trading mechanism would have to be sustained by a fund under the custody of the Brazilian government, whose collaterals would have to be provided by Argentina — wheat contract receivables and Chinese bonds would be examples of such collaterals. 

Through this arrangement, Brazilian banks could start lending to Argentina again. 

Argentina imported around USD 15.3 billion in goods from Brazil last year, 95 percent of which were industrialized items. Brazil, in turn, imported USD 13.1 billion worth of goods from its South American neighbor, which makes it its...