Analyzing: Crypto Crash Doesn’t Leave El Salvador An Easy Way As Crisis Worsen

SAN SALVADOR/NEW YORK, May 19 (Reuters) – El Salvador’s big bet on bitcoin, which the Central American nation has been buying since September, has soured in recent weeks as a cryptocurrency defeat has shaved more than a third of its value. government assets, according to Reuters calculations.

Under populist president Nayib Bukele, a cheerleader of vocal currency, El Salvador has gone all-in on bitcoin, not only becoming the first country in the world to adopt it as legal tender, but also planning for a volcanic eruption. powered cryptocurrency mining hub with plans to issue the coin’s first government bond.

With rising global borrowing costs and a major debt service on the horizon, El Salvador has more fiscal problems than the impact of the weak currency. But the crypto crisis has also closed off a number of potential exit routes from the crisis, including the now-reported bitcoin bond.

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“The government’s financial problems are not caused by bitcoin, but they have been exacerbated by bitcoin,” said Ricardo Castaneda, senior economist and national coordinator for El Salvador and Honduras at the think tank Central American Institute for Tax studies (ICEFI). For the government, he said, “bitcoin is no longer a solution and has become part of the problem”.

Bitcoin is down 45% since El Salvador now adopted it in early September, and 26% since its peak in May, as crypto assets have been dragged into a risky investment environment.

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

El Salvador’s debt stood at $24.4 billion in December, up from $19.8 billion at the end of 2019, after the Bukele administration allowed millions of dollars to mitigate the COVID-19 pandemic and its economic effects in the world. over the past two years.

The International Monetary Fund estimates that its economy’s current account deficit, which relies on remittances and external financing, will avoid $2 billion by 2025.

But bitcoin’s adoption has put the country at odds with multilateral lenders like the IMF, which Treasury Secretary Alejandro Zelaya said last year was seeking $1.3 billion.

The fund advised El Salvador to abandon bitcoin altogether. Any agreement for a line of credit should consider risks, including “those related to the acceptance of bitcoin as legal tender, as well as risks related to economic governance,” an IMF official said Wednesday.

Rating agencies avoided accepting bitcoin as facilitating money laundering and, crucially, bitcoin’s risk gave forced investors another reason to demand higher returns.

On Wednesday, they were looking for a first-ever all-time high of 2,445 basis points against US Treasuries (.JPMEGDELSR).

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Bukele’s moves to centralize power, from removing all top justices from the country’s Supreme Court to allowing immediate reelection despite constitutional term limits, have increased the risk premium.

“If there is no potential for bitcoin growth dividends or innovative bitcoin financing, then the Bukele administration will have to prioritize spending and identify financing options,” said Siobhan Morden, head of fixed income strategy in Latin America at Amherst Pierpont.

Reuters calculations of a $36 million paper loss in bitcoins, enough to make at least some of those coupon payments, are based on Bukele’s tweets and an estimate of prices on buy dates. The government has spent approximately $104.2 million on 2,301 coins with a current value of just $67.9 million, using Wednesday’s volume-weighted average price.

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The country must pay $329 million in interest on its international bonds this year, as well as $800 million from a bond that matures in January.

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

A restructuring of El Salvador’s debt is “inevitable” if the country continues with the “current political mix,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management. “Debt in El Salvador can be sustainable with the right program (IMF). But they must act now.

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

Salvadoran bonds trade between 43.5 cents and 34 cents on the dollar, except for the January maturity at 75 cents, reflecting cautious optimism about the country’s ability to make that payment.

According to data from S&P Global, the cost of insuring investors against a Salvadoran government debt rose over the next five years to its highest level since 2020.

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Reporting by Nelson Renteria in San Salvador, Sarah Kinosian in Mexico City and Rodrigo Campos in New York Additional reporting by Jorgelina do Rosario in London Editing by Christian Plumb and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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