There is no single Argentine peso. There are multiple official and unofficial exchange rates. The latest tally I saw from credible sources was that there are around 30 different FX exchange rates to the dollar alone.
My favourite is still the ‘Coldplay dollar’, which was used for the UK band’s tour of the country in October 2022. Other recent versions include the ‘Qatar dollar’, which set a specific rate (of Ps300 to the dollar) for all consumption on credit cards in Qatar during the World Cup.
Multiple exchange rates are the Argentine government’s way of creating taxes without calling them taxes. They aim to stem outflows of the dollar that would naturally occur because of the official rate’s overvaluation – around Ps188 on February 6.
The success of the Plano Real owed as much to the technicalities of Brazil’s financial infrastructure as it did to the actual idea
A need for a radical currency reboot for Argentina is obvious. This column argued as much in December 2021. My proposal then was (and still is) in favour of an adaptation of Brazil’s Plano Real from the early 1990s. But even this more modest strategy would be futile without the necessary (and unlikely) monetary and fiscal discipline to accompany a ‘new peso’.
And so, instead of looking at the lengthy list of macroeconomic and financial issues that make a currency union between Argentina and Brazil not only impractical but impossible, it is probably worthwhile looking at the key micro issues that made the Plano Real a success for Brazil in the first place.
The trick
Persio Arida, economist, former president of the Central Bank of Brazil and one of the fathers of the measures taken to stabilize the Brazilian economy, spoke to Euromoney in 2019 about the new currency’s launch and its legacy for Brazilian banking.
He outlined the strategy like this: “At the heart of the Plano Real was the creation of a parallel currency, the URV [Unidade Real de Valor, or Real Value Unit], which was always worth $1, and conversion with the existing currency was provided daily. Contracts were denominated in this virtual currency. Bonds were indexed to the URV.”
Arida, who is still held in near-reverence in Brazil, added: “No one really understood the trick: how can inflation go down to zero straight away? It worked like a miracle and people still don’t really understand it.”
However, the success of the Plano Real owed as much to the technicalities of Brazil’s financial infrastructure as it did to the actual idea.
If it wasn’t for the computational capacity of the Brazilian financial system – essentially its ability to enable positive interest rates to be maintained within a system, even when faced with hyper-inflation and the high velocity of money – the Plano Real wouldn’t have succeeded in the manner that it did.
Not only that, but in the years running up to the monetary experiment, the banking system would have been substantially weakened as banks couldn’t have profited from payment floats, and liquidity would have drained abroad: why would investors keep money onshore if it was receiving negative returns?
Inflation – though admittedly high at a peak of 2,477% in 1993 – could have spiralled to the levels we see in Venezuela today.
That computational capacity was essential in maintaining an underlying level of confidence in the overall system, without which outbound capital flows would have been even higher.
Smaller lessons
There are other interesting, smaller lessons from the Plano Real. One was that it sparked consolidation in the banking sector. Brazil went from having a system much like Argentina’s today – dozens of small banks serving distinct regions and/or segments – to a hyper-consolidated industry.
This consolidation was encouraged because it enabled the creation of stronger, more robust banks that could better withstand economic and financial volatility.
Perhaps the process went too far: the top five banks in Brazil at one point comprised more than 85% of system credit, and sky-high net interest margins frustrated economic growth.
Argentina also needs banking consolidation and would do well to heed Brazil’s experience and attempt to avoid such an extreme swing of the pendulum.
New digital banks will also likely prevent an Argentine elite of firms with a chokehold on the banking system.
The currency stability that is the Plano Real’s legacy could well be about to bring about some other economic miracles for Brazil: an economy free from inflation, free from an over-consolidated banking sector and free from being shackled to a dysfunctional neighbouring economy that needs to reform itself out of its own mess.
