Latin America will soon have a new currency, the Sistema Único de Compensación Regional, or Sucre, for short. It’s no coincidence that the currency’s acronym is also the name of 19th century regional independence leader, Antonio José de Sucre, close friend and ally of Simón Bolívar, in whose name the currency’s proponents (members of the Alianza Bolivariana para los Pueblos de Nuestra América, or ALBA) are carrying out their socialist revolution. But histrionics aside, is the currency really a step towards throwing off the ‘dictatorship of the dollar’, as Venezuelan President Hugo Chávez argues, or is it simply an attempt to hide glaring domestic economic mismanagement by jumping on the anti-dollar bandwagon?

For starters, there’s plenty of reason for some of the Sucre’s five initial members to seek an alternative to the greenback. Many regional economies have been able to replenish US dollars reserves of late, primarily thanks to their status as commodity exporters and the recent uptick in global commodity prices. However, the dependence of the likes of Venezuela and Ecuador (two signatories to the Sucre) on oil price fluctuations means a drop in prices threatens these countries’ primary source of dollar earnings, placing greater pressure on importers.

May Get Away With It Initially…
On the face of it, a currency union between some of Latin America’s weakest economies hardly inspires confidence (the other three economies who have opted to join are Bolivia, Nicaragua and Cuba!). Nevertheless, with plenty of political will behind it, and signs pointing towards stronger oil prices going forward, there is likely to be both the desire and the oil-generated funds to support the currency for now.

More importantly, as use of the Sucre will be limited to trade between the five economies, at least until other states decide to join, the level of funding required to back the currency would be relatively low. For example, Venezuela’s combined exports to Bolivia, Ecuador and Nicaragua (unsurprisingly, I couldn’t get hold of the data for Cuba) totalled just US$687mn in 2008, a fraction of its total US$115.6bn exports last year. As a result, there seem to be few obstacles to the implementation of the currency near term.

…But How Long Will It Last?
The more pertinent question, though, is how will the currency fare beyond the medium term? For one, I don’t expect a rush by other regional states to sign up for Sucre membership, as unlike the euro, which is seen by many as a sign of stability, the economic and political leadership of those joining this currency is far from stable. Another obstacle to the development of the currency union is existing regional agreements, such as the Eastern Caribbean Currency Union, which has prevented three other ALBA members (Antigua and Barbuda, Dominica and Saint & the Grenadines) from signing up. With Honduras – the remaining ALBA member – also unlikely to join if ousted President Manuel Zelaya is prevented from running for another term in office (our core scenario), the list of potential candidates is slim.

Perhaps the main issue, though, is how to value the currency. Will it be a fixed or crawling peg, measured against a basket of other currencies or simply against the dollar? If fixed, what should it be fixed to? Set it too high, and it could actually serve to dampen rather than stimulate trade between member states, but too low could be seen as a sign of underlying weakness in the member economies. As far as I’m aware, there are no precedents outside of the former-Soviet Council for Mutual Economic Assistance (Comecon), and we all know how that turned out. In other words, while the currency union looks set to go ahead, there is little chance of it spreading far beyond its initial members, and as a result is unlikely to be taken seriously by global investors.