The plan will require a change in law in the two countries before it can be implemented, although senior managements at the central banks hope that it should be in place by mid-2007.
The proposal will allow importers and exporters to trade directly in their respective local currencies. So, for example, an Argentine importer will be able to pay in pesos, and the Brazilian exporter will receive its payment in reais. These payments are then processed via the central banks, which set the exchange rates each day.
Currently, all trade between Argentine and Brazilian businesses is conducted in dollars, as required by the law in both countries. However, that leads to inefficiencies, high transaction costs and liquidity issues because of the multiple currency exchanges that are needed for trades to be executed.
“This [new] model will not replace the current payments method – it will just offer an alternative,” says Cristina Pasin, principal manager of the project at the Banco Central de la República Argentina (BCRA). “We aim to develop a system that will offer an attractive option for players and so in time a local market, in a local currency, will develop for the private sector to eventually exploit.” She hopes that, with time, these trades will help the development of local currency futures and options markets.
Martin Castellano, chief of staff at the BCRA, says: “So far two working groups from each central bank have formed and have held internal and bilateral talks. The feedback is very positive. The current system involves transaction costs that are not negligible so companies of all sizes will hopefully enjoy and take advantage of the proposed model.”
Pasin adds: “This method will not only reduce transaction costs due to its being a single currency exchange, instead of two; it will also increase liquidity for the central banks as at the end of each day, when operations are calculated, only the [outstanding] balance sheet will be paid instead of a full payment for every transferred good.” This daily settlement will occur in New York in dollars.
The market norm of Argentina paying invoices within 90 days makes the plan yet more attractive. This time period exposes exporters to currency volatility. With this volatility risk being spread over two currency exchanges there is more uncertainty than a single exchange system will offer. Therefore, as Pasin says: “This market norm will encourage more exporters to use this payment system. Decreased risk of currency movements decreases the risks of currency exchanges affecting the value of goods.”
However, Pasin emphasizes the caution the two central banks are exercising at the moment: “There is still a great deal of work to be done before we can present this idea to the banks and potential future players.”
