El Salvador’s bet on bitcoin has already cost the government enough to cover its next interest payment to bondholders, underscoring the great risks posed by its cryptocurrency experiment.
The pullback that has taken bitcoin down 40% since late March has compounded cumulative losses in presidential government holdings Nayib Bukele at around $40 million, according to an estimate by Bloomberg. That’s slightly more than the next coupon payment on its foreign debt, $38.25 million due June 15 in notes maturing in 2035.
Bukele’s government has spent around $105 million buying bitcoin since becoming the first country in the world to convert the token into legal tender in September, according to its announcements on Twitter. Since the first purchase, the cryptocurrency has fallen 45%, reducing the value of the country’s 2,301 bitcoins to around $66 million.
A few days ago, Moody’s Investors Service downgraded the country’s credit rating by two notches and warned that holders of its bonds risked heavy losses. El Salvador is the first country in the world to make bitcoin legal tender and its president is considering issuing a billion-dollar bond backed by bitcoin, but Finance Minister Alejandro Zelaya had to admit a few days ago that the Falling cryptocurrency price is already affecting investor demand. .
The graph shows, in red, when El Salvador started buying its bitcoins and how since then the digital currency has lost 44% of its value.
The recent crash of cryptocurrencies, with bitcoin coming in to trade below $26,300 today (and which after 18 in Argentina was around $28,300) This is another blow for Bukele, a staunch crypto enthusiast who has been trying to sell a bitcoin-backed bond for more than five months. However, investors have been lukewarm about El Salvador bonds, concerned not only about the government’s ability to service its debt, but also its willingness to do so.
El Salvador does not publish data on its bitcoin holdings.
The country was also in talks with the IMF, but negotiations stalled after Bukele adopted cryptocurrency as legal tender.
The country’s external debt prices have fallen about 18% this year, leaving 10- and 30-year bonds trading at around 40 cents on the dollar in troubled territory. The next capital payment is in January for $800 million. The 22% discount to the price at which the notes are trading suggests some hesitation on the part of investors about meeting the obligation.
El Salvador owes bondholders $382 million in interest this year, with July being the heaviest month for payments as $183 million is due. In April, the country had $3.4 billion in reserves, according to the central bank, and the government plans to raise $1 billion through the bitcoin-backed bond, although it is unclear at this stage whether the transaction will proceed.
Bukele announced on social networks that this week the country bought more bitcoins
The country was also in talks with the International Monetary Fund, but negotiations stalled after Bukele adopted cryptocurrency as legal tender. Since then, the spreads of the credit default swaps de la nation, a type of late payment insurance, rose more than 20 percentage points, implying an 87% probability of default over the next five years.
Purchasing and qualification
Last Monday, El Salvador announced the purchase of 500 bitcoins, its largest cryptocurrency acquisition to date. At the time, he was paying around $31,000 per unit. The government purchased the coins at an average price of $30,744, Bukele said on Twitter.
Four days before this operation, Moody’s Investors Service shed light on the country, downgraded its credit rating and warned that the country’s bonds risked suffering heavy losses.
The agency reduced the country’s long-term external debt rating to “Caa3” from “Caa1”, arguing “a higher probability of a credit event: restructuring, change in difficulty or default”.
“The downgrade incorporates Moody’s expectations of material losses for investors ahead of the next two bond redemptions,” the rating agency said in a statement.
El Salvador has an $800 million bond payment due in January 2023, followed by another due in January 2025.
The downgrade “is largely due to the lack of a credible financing plan, a factor that increases credit risks stemming from restricted market access due to distressed yields on El Salvador’s external debt”, Moody’s said.
The country’s foreign dollar bond spreads widened to more than 2,200 basis points above the United States, reflecting a high level of distress. The government’s reliance on short-term domestic debt increases credit risks, Moody’s said.