Led by populist President Nayib Bukele, a staunch defender of the currency, El Salvador went all out to use bitcoin, not only becoming the first country in the world to adopt it as legal tender, but also planning propose a mining hub of volcano-powered cryptocurrencies that plan to issue the first coin-linked government bond.
With rising global borrowing costs and a major debt service on the horizon, El Salvador faces fiscal challenges other than the impact of the currency crash. But the cryptocurrency’s collapse also closed off some potential exit ramps from the crisis, including the now-deferred bitcoin bond.
“The government’s financial problems are not caused by bitcoin, but they have been made worse by bitcoin,” said Ricardo Castaneda, senior economist and national coordinator for El Salvador and Honduras at think tank Central American Institute for Fiscal 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 officially adopted it in early September, and by 26% since its peak in May when crypto assets were wiped out in a risk-free investment environment.
The combined 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 stood at $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 impact over the past two years. year to tackle.
The International Monetary Fund estimates that its economy’s current account deficit, which relies on remittances and external financing, will approach $2 billion by 2025.
But bitcoin’s approval has put the country at odds with multilateral creditors like the IMF, finance minister Alejandro Zelaya said at https://www.reuters.com/article/us-el-salvador-economy-exclusive/exclusive -el- salvador-seeks-imf-finance-sees-golden-opportunity-for-economy-finance minister-idUSKBN2AW1GV says last year that the government was looking for $1.3 billion.
The fund advised El Salvador to abandon bitcoin altogether. Any agreement for a line of credit must address 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 have warned that bitcoin’s adoption could facilitate money laundering and, crucially, bitcoin’s risk has given bond investors another reason to demand higher yields.
As of Wednesday, they were looking for a record premium of 2,445 basis points on US Treasury bills.
Bukele’s moves to centralize power, from removing all top judges from the country’s highest court to obtaining permission to run for immediate reelection despite constitutional term limits, have helped to 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,” said Siobhan Morden, head of bitcoin. Fixed Income Strategy in Latin America at Amherst Pierpont.
Reuters’ calculations of a $36 million paper loss in bitcoin, 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 about $104.2 million on 2,301 units that are now worth just $67.9 million at Wednesday’s volume-weighted average price.
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 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 public into a government 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 can be sustainable with the right (IMF) program. But they must act now.”
The country’s finance minister, Zelaya, declined to comment on this story.
Salvadoran bonds trade between 43.5 cents and 34 cents on the dollar, excluding the 75 cent maturity in January, signaling 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.