Brazil and Argentina want to do without the dollar

First modification: 05/04/2023 – 11:35

Pay Brazilian imports in Argentine pesos. It is the tempting proposal of President Lula to that of his counterpart Alberto Fernández. He is a true blessing to this struggling country. Overindebted, eaten away by hyperinflation, diminished by a historic drought that has killed crops, undermined by the erosion of its currency, which has lost 44% against the dollar in the last year. For all these reasons, Argentina has a recurring shortage of US currency. But for now, this promise remains an empty shell. The two presidents bitterly discussed the issue during their meeting on Tuesday in Brasilia, without reaching a concrete announcement. Its ministers are scheduled to meet again in the coming days to try to develop a secure mechanism for both countries.

Your trade is currently settled in dollars, a widespread situation in the world

45% of world trade is done in dollars. This has become an ease in many commodity markets such as oil. This dominance of the dollar has advantages: trade is more fluid. This coin is reassuring around the world. When a crisis occurs, everyone goes to the dollar. The problem for the States that are forced to use it is that they have no control over it, it is the exclusive privilege of the world’s leading power. This hegemony has been contested for fifty years, but so far no country has succeeded in freeing itself from it.

What is the motivation of the emerging countries to break with the greenback?

Those who have borrowed in dollars in international markets and see their currency fall rapidly understand the trap that can be for their finances. Emerging countries are also politically motivated. Chinese in particular. Beijing is signing all kinds of agreements to trade in yuan. With countries like Russia and Brazil, and recently with Argentina. But also with companies. TotalEnergies has agreed to a yuan settlement for its LNG exports to a Chinese state-owned company. India is also offering rupee settlements to Malaysia and East African countries. Countries under US sanctions are also looking for an alternative to the greenback.

The BRICS are now dreaming of a common currency

Nineteen countries want to join the club formed by the five great emerging nations to participate in this common currency. It could be backed by gold. It will take years of negotiations before this project becomes a reality. The BRICS have recently created a development bank. It is chaired by Dilma Rousseff, from Brazil, former president and partner in Lula’s political career. The Brazilian president has proposed that the matter be referred to the BRICS bank, since he was unable to fulfill his promise to Argentina.

Why is it difficult to do without the dollar in trade between Brazil and Argentina?

The State proposes to open a line of credit to finance exports to Argentina, which will be paid in pesos. But the operation is risky: it is not certain that it will recover its initial investment given the permanent erosion of the peso. Brazil has already suffered losses with Cuba and Venezuela and does not want to pay them again. Although the risk is worth it. Brazil believes it has lost ground in Argentina to China, which offers alternative payment solutions to the dollar.