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UNCLAS SECTION 01 OF 02 BRASILIA 001655
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STATE PASS USTR - MSULLIVAN
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E.O. 12958: N/A
TAGS: ETRD EFIN BR
SUBJECT: MIXED SIGNALS ON LOCAL CURRENCY-DENOMINATED TRADE WITH
ARGENTINA
1. (SBU) Summary. According to the local press, on July 20
Brazilian Finance Minister Guido Mantega met with Argentine Economy
Minister Felisa Miceli on the margins of the Mercosul Summit meeting
to discuss ways to conduct trade between the two countries in local
currency (reais/pesos) instead of dollars. Such proposals have been
floated unsuccessfully in the past, and Argentine Embassy and
Brazilian Central Bank (BCB) contacts tell us that the two countries
are currently far from any agreement on de-dollarizing their trade
relations, although an exploratory meeting between the two
countries' central banks is planned for August 14. Meanwhile, we
were told, Brazil plans to double down on the issue by proposing
that all five Mercosul countries use local currency for intra-bloc
transactions. Given the complexity of the issues, it is unlikely
that the GOB would be able to get its bloc partners to agree on this
before its short five-month Mercosul presidency ends in December.
End Summary.
2. (SBU) At various times in the past, Brazil and Argentina have
been perhaps only one or two steps away from dollarizing their
economies (either de jure or de facto). However, in 2003 the
shortage of dollars in both markets pushed the two governments in
the opposite direction, i.e., towards greater reliance on local
currencies. That year the Sao Paulo Futures and Mercantile Exchange
(BMF) proposed to then-Argentine Central Bank President Alfonso Prat
Gay the idea of real/peso denominated trade. However, negotiations
between Brasilia and Buenos Aires tailed off in 2004 and later
stalled completely in 2005 when former Brazilian Finance Minister
Antonio Palocci became enmeshed in unrelated scandals. Now current
FinMin Mantega and his Argentine counterpart have revived the idea.
3. (SBU) In 2005, Brasil exported US$9.9 billion worth of goods to
Argentina, while Argentina sent US$6.2 billion to Brazil. Under the
contemplated local currency mechanism, payment for these
transactions would be made in reais and pesos. Proponents argue
that such a move would strengthen both countries by: a) making the
two currencies more widely accepted, and b) lowering operational
costs. To the extent that trade flows match, reliance on
reais/pesos to make payments would be foreign exchange neutral as
the respective Central Banks and currency futures trading via the
BMF could be used as a conduit to allow exporters to recycle the
local currency to importers. Still unanswered, though, is the
question of whether the two central banks would purchase businesses'
excess pesos or reais. Given that Brazil over recent years has run
a consistent trade surplus with Argentina, the BCB could expect to
have to purchase pesos from Brazilian businesses, presumably for
immediate resale to the Argentine Central Bank. And if the BCB did
so, what currency would it use to effectuate payment?
4. (SBU) An advisor to the Board of the BCB told us that the idea
echoes in many ways currency settlements mechanisms created in the
1970s (and then abandoned in the early 1980's) to facilitate trade
between hard-currency starved countries. In those arrangements, the
central banks served as clearing houses, purchasing the foreign
currency (zlotys, pesos, etc) from local exporters using local
currency (e.g. Reais) and then settling accounts quarterly or so
with the counterpart central bank. The central banks bore the
exchange rate risk until the settlement took place and any surplus
that one side had was paid in hard currency. According to our BCB
contact, the arrangements collapsed in large part because the
central banks could not continue to bear the exchange rate risk as
more and more countries liberalized capital movements and moved to
flexible or floating exchange rates. While overcoming this problem
would be the biggest challenge for the renewal of such local
currency settlement mechanisms, the BCB advisor noted that it could
be done to the extent that the currency risk was hedged immediately
(by the exporter or importer) using BMF futures contracts.
BRASILIA 00001655 002 OF 002
5. (SBU) Argentine diplomats tell us that, based upon their
conversations with GOA Central Bank staffers, the idea of conducting
bilateral trade in reais/pesos is one that is not yet ripe.
Notwithstanding Miceli's initial contact with Mantega, the true
demandeur on this issue, they say, is Brazil. The BMF, they note,
would gain by selling peso/real currency futures to businesses as
might Brazilian small and medium-sized enterprises which sometimes
find the cost of conducting dollar-based transactions, which entails
two currency trades (from Reals to dollars and then to pesos or vice
versa), too expensive. However, in the short-term Argentine
exporters want to keep the dollars they receive from Brazilian
buyers and thus may look at the scheme askance. Meanwhile, a
technical-level meeting between staff of the two countries' central
banks is scheduled for August 14 in Sao Paulo for what a BCB contact
said are "very preliminary" discussions. According to our contacts,
no concrete proposals are likely to be floated; instead, the two
sides will take the opportunity to "brainstorm."
6. (SBU) Notwithstanding the fact that bilateral Brazil-Argentina
local currency trade may not be ready for prime-time, we were told
that Brazil intends to move further and propose that all Mercosul
transactions be conducted in local currency. Our Argentine Embassy
contacts speculated that Brasilia was charging forward on this
because it wanted to local currency trade to be one of its highlight
achievements during its current 5-month Mercosul presidency, which
terminates at the end of 2006.
7. (SBU) Comment. While local currency trade within Mercosul is a
laudable goal, post does not see it coming to pass anytime soon.
The lion's share of commerce is between Brazil and Argentina. If
those two countries can't agree on the concept, it will be all the
more difficult to forge consensus with Uruguay, Paraguay and
Venezuela. End Comment.
Sobel