The cryptocurrency crash does not let El Salvador easily get out of the deeper crisis.

Led by populist President Nayib Bukele, a staunch defender of the currency, El Salvador went all out on bitcoin, not only becoming the first country in the world to adopt it as a legal tender, but also drawing up plans for a volcano hub. driven cryptocurrencies planning to issue the first currency-linked government bond.

With rising global borrowing costs and a large debt repayment on the horizon, El Salvador has other fiscal headaches than the impact of the currency crash. But the cryptocurrency collapse also closed some potential exit ramps from the crisis, including the now-deferred bitcoin bond.

“The government’s economic problems are not caused by bitcoin, but they have gotten worse because of bitcoin,” said Ricardo Castaneda, senior economist and national coordinator for El Salvador and Honduras at the Central American Institute for Fiscal Studies (ICEFI) think tank. For the government, he said, “bitcoin has ceased to be a solution and has become part of the problem.”

Bitcoin has fallen 45% since El Salvador officially adopted it in early September, and 26% since it peaked in May when cryptocurrencies were swept away in a risk-free investment environment.

The total market value of all cryptocurrencies recently fell to $ 1.2 trillion, less than half of what it was last November, according to data from CoinMarketCap.

El Salvador’s debt was $ 24.4 billion in December, up from $ 19.8 billion at the end of 2019, after the Bukele administration allocated millions of dollars to deal with the COVID-19 pandemic and its economic effects over the last two years.

The International Monetary Fund estimates that its economy’s balance of payments deficit, which depends on remittances and external financing, will approach $ 2 billion by 2025.

But the adoption of bitcoin has put the country at odds with multilateral creditors like the IMF, as Finance Minister Alejandro Zelaya said at salvador-seeks -imf-financing-sees-golden-opportunity-for-finance-says-finance-minister-idUSKBN2AW1GV last year that the government sought $ 1.3 billion.

The fund recommended that El Salvador completely abandon bitcoin. Any agreement on a line of credit should address risks, including “those related to the adoption of bitcoin as legal tender as well as risks related to economic governance,” an IMF official said Wednesday.

Rating agencies have warned that the adoption of bitcoin could facilitate money laundering, and crucially, bitcoin’s risk has given bond investors another reason to demand higher returns.

On Wednesday, they were looking for a record premium of 2,445 basis points relative to US government bonds.

Bukele’s efforts to centralize power, from removing all top judges from the country’s Supreme Court to being allowed to stand for immediate re-election despite constitutional time constraints, have helped increase the risk premium.

“If there is no potential for dividends from bitcoin growth or innovative bitcoin financing, then the Bukele administration will have to prioritize spending and identify financing options,” according to Siobhan Morden, Head of Bitcoin. interest rate strategy in Latin America with Amherst Pierpont.

Reuters’ calculations of a paper loss of $ 36 million in bitcoin, enough to make at least some of these coupon payments, are based on Bukele’s tweets and an estimate of prices on purchase dates. The government spent about $ 104.2 million on 2,301 pieces, now worth only $ 67.9 million at Wednesday’s volume-weighted average price.

The country is due to pay $ 329 million in interest on its international bonds this year, as well as $ 800 million of a bond maturing in January.

ICEFI’s Castaneda listed funding options, including Central American and Latin American development banks – CABEI and CAF, respectively – as possible solutions to fund the $ 800 million payment in January. Another option, he said, is to nationalize the country’s pension fund to cover the tax deficit – which could be done by transferring savings from the government to a state account.

A restructuring of El Salvador’s debt is “inevitable” if the country continues with the “current political panorama”, said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management. “El Salvador’s debt could be sustained with the right (IMF) program. But they have to act now.”

The country’s finance minister, Zelaya, declined to comment on this story.

Salvadoran bonds are trading between 43.5 cents and 34 cents on the dollar, with the exception of the January 75 cent maturity, reflecting a cautious optimism about the country’s ability to make this payment.

The cost of insuring investors against a Salvadoran state default over the next five years rose to its highest level since 2020 on Wednesday, according to data from S&P Global.

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