El Salvador’s big bet on bitcoin, which the Central American nation has been buying since September, has deteriorated in recent weeks as the cryptocurrency crash has slashed more than a third of government assets, Reuters estimates.
Under the leadership of populist President Nayb Bukele, a vocal cheerleader in the currency, El Salvador moved all-in for bitcoin, not only becoming the first country in the world to adopt it as legal tender, but also outlining plans for a cryptocurrency hub. powered by volcanoes and plans to issue the first sovereign bond associated with the coin.
With rising global borrowing costs and high debt repayments on the horizon, El Salvador has other fiscal headaches besides the impact of currency depreciation. But the decline in cryptocurrencies has also closed some potential deviations from the crisis, including the deferred bitcoin bond.
“The government’s financial problems are not because of bitcoin, but they have worsened because of bitcoin,” said Ricardo Castaneda, senior economist and national coordinator for El Salvador and Honduras at the Central American Institute for Fiscal Research (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 percent since El Salvador officially adopted it in early September, and 26 percent from its highest level in May as crypto assets were swept into a risk-free investment environment.
The combined market value of all cryptocurrencies recently fell to $ 1.2 trillion (approximately Rs. 93,166.60 kroons), less than half of what it was last November, according to data from CoinMarketCap.
El Salvador’s debt was $ 24.4 billion (approximately Rs.1.89,400 Crore) as of December, from $ 19.8 billion (approximately Rs. 1.53,700 core) at the end of 2019, after the Bukele administration granted millions of dollars to deal with the COVID-19 pandemic and its economic effects over the past few years.
The International Monetary Fund estimates that the current account deficit for its translation and external financing economy will be close to $ 2 billion (approximately Rs 15,500) by 2025.
But the adoption of bitcoin has put the country in conflict with multilateral creditors such as the IMF, of which Finance Minister Alejandro Zelaya said last year that the government was seeking $ 1.3 billion (approximately 10,090 kroner).
The fund advised El Salvador to abandon bitcoin altogether. Any credit line transaction will have to 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 on Wednesday.
Rating agencies have warned that accepting bitcoin could make money laundering easier, and importantly, the risk of bitcoin has given bond investors another reason to demand higher returns.
As of Wednesday, they were aiming for a record high premium of 2,445 basis points over US bonds.
Bukele’s movements to centralize power, from removing all top judges in the country’s Supreme Court to gaining muscle through an immediate re-election mandate despite the limitations of the constitutional mandate, have helped increase the risk premium.
“If there is no potential for dividends for bitcoin growth or innovative bitcoin financing, then the Bukele administration will have to prioritize spending and identify financing options,” said Sioban Morden, head of fixed income strategy in Latin America at Amherst. Pierpont.
Reuters’ estimates of a $ 36 million (approximately Rs. 279) loss of bitcoin paper, enough to make at least some of these coupon payments, are based on Bukele’s tweets and estimates of purchase date prices. The government has spent about $ 104.2 million (approximately 808 rupees) on 2,301 coins, which now cost only $ 67.9 million (approximately 5,7,100 rupees), using Wednesday’s weighted average price.
The country is due to service $ 329 million (approximately Rs. 2,554) in interest on its international bonds this year, as well as $ 800 million (Rs. 6,210) in a bond scheduled for maturity in January.
Castaneda of ICEFI listed financing options, including Central American and Latin American development banks – CABEI and CAF, respectively – as possible patches to finance the $ 800 million payment due in January. Another option, he said, is to nationalize the country’s pension fund to cover the fiscal deficit – which could be done by transferring society’s savings to a state account.
Debt restructuring for El Salvador is “inevitable” if the country continues with the “current policy mix”, said Polina Kardyavko, head of emerging markets at BlueBay Asset Management. “El Salvador’s debt can be sustained with the right program (IMF). But they need to act now.”
The country’s finance minister, Zelaya, declined to comment on the story.
El Salvador bonds traded between 43.5 cents and 34 cents on the dollar, except for a 75-cent maturity in January, reflecting cautious optimism that the country could make that payment.
The cost of insuring investors against the bankruptcy of Salvador’s sovereign over the next five years on Wednesday reached its highest level since 2020, according to S&P Global.
© Thomson Reuters 2022