Brazil and Argentina will this week announce that they are starting preparatory work on a common currency, in a move which could eventually create the world’s second-largest currency bloc.

South America’s two biggest economies will discuss the plan at a summit in Buenos Aires this week and will invite other Latin American nations to join.

The initial focus will be on how a new currency, which Brazil suggests calling the “sur” (south), could boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. It would at first run in parallel with the Brazilian real and Argentine peso.

“There will be . . . a decision to start studying the parameters needed for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” Argentina’s economy minister Sergio Massa told the Financial Times.

“It would be a study of mechanisms for trade integration,” he added. “I don’t want to create any false expectations . . . it’s the first step on a long road which Latin America must travel.”

Initially a bilateral project, the initiative would be offered to other nations in Latin America. “It is Argentina and Brazil inviting the rest of the region,” the Argentine minister said.

A currency union that covered all of Latin America would represent about 5 per cent of global GDP, the FT estimates. The world’s largest currency union, the euro, encompasses about 14 per cent of global GDP when measured in dollar terms.

Other currency blocs include the CFA franc which is used by some African countries and pegged to the euro, and the East Caribbean dollar. However these encompass a much smaller slice of global economic output.

The project is likely to take many years to come to fruition; Massa noted that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian president Luiz Inácio Lula da Silva’s visit to Argentina that starts on Sunday night, the veteran leftist’s first foreign trip since taking power on January 1.

Brazil and Argentina have discussed a common currency in the past few years but talks foundered on the opposition of Brazil’s central bank to the idea, one official close to the discussions said. Now that the two countries are both governed by leftwing leaders, there is greater political backing.

A Brazilian finance ministry spokesman said he did not have information about a working group on a common currency. He noted that finance minister Fernando Haddad had co-authored an article last year, before he took his current job, proposing a south American digital common currency.

Trade is flourishing between Brazil and Argentina, reaching $26.4bn in the first 11 months of last year, up nearly 21 per cent on the same period in 2021. The two nations are the driving force behind the Mercosur regional trade bloc, which includes Paraguay and Uruguay.

The attractions of a new common currency are most obvious for Argentina, where annual inflation is approaching 100 per cent as the central bank prints money to fund spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 on the widely used parallel exchange rate.

However, there will be concern in Brazil about the idea of hitching Latin America’s biggest economy to that of its perennially volatile neighbour. Argentina has been largely cut off from international debt markets since its 2020 default and still owes more than $40bn to the IMF from a 2018 bailout.

Lula will stay in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of leftwing leaders for the first time since a wave of elections last year reversed a rightwing trend.

Colombia’s president Gustavo Petro was likely to attend, officials said, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s revolutionary socialist president Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s president Andrés Manuel López Obrador generally shuns overseas travel and is not scheduled to participate. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.

Argentina’s foreign minister Santiago Cafiero said the summit would also make commitments on greater regional integration, the defence of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needed to discuss what sort of economic development it wanted at a time when the world was hungry for Latin America’s food, oil and minerals.

“Is the region going to supply this in a way which turns its economy [solely] into a raw material producer or is it going to supply it in a way which creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who runs the Celag regional political think-tank in Buenos Aires, said the summit would discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as making progress on a currency union.

“The monetary and foreign exchange mechanisms are crucial,” he said. “There are possibilities today in Latin America, given its strong economies, to find instruments which substitute dependence on the dollar. That will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said that CELAC, founded in 2010 to help Latin American and Caribbean governments co-ordinate policy without the US or Canada, was the only such pan-regional integration body which had survived over the past decade as others fell by the wayside.

However, Latin America’s leftist presidents now face more difficult global economic conditions, trickier domestic politics with many coalition governments, and less enthusiasm from citizens for regional integration.

“Because of this, all the steps towards integration will certainly be more cautious . . . and will have to be focused directly on delivering results and showing why they are useful”, he cautioned.

Additional reporting by Bryan Harris in São Paulo