LONDON (Bywire News) -El Salvador bet big on Bitcoin and now it's paying. The crypto crash has left the country reeling government’s holdings slashed by a third in value. With the country’s president having gone all in on Bitcoin, it’s hard to see an easy way out.
President Nayib Bukele has been a prominent cheerleader for the country. El Salvador was the first to adopt it as legal currency and has been buying big since September. They have also sketched out plans for a volcano powered crypto mining hub and plans the first sovereign bonds linked to the coin.
However, crypto’s slump which saw $200 billion erased from the market in a blink of an eye could not have come at a worse time. El Salvador was already struggling with global borrowing costs and a big debt repayment looming. Bitcoin’s struggles have closed off potential ramps including the Bitcoin bond which has now been postponed.
“The government's financial problems are not because of bitcoin, but they have gotten worse because of bitcoin,” said Ricardo Castaneda, senior economist and country coordinator for El Salvador and Honduras at the think tank Central American Institute for Fiscal Studies (ICEFI). For the government, he said, "bitcoin ceased to be a solution and has become part of the problem."
Since El Salvador adopted it in September, Bitcoin has lost almost half of its value. It is currently trading at under $30,000 having pushed towards $50,000 just a few weeks ago. According to CoinMarketCap, the combined value of all cryptocurrencies is less than half its level in November at $1.2trillion.
For El Salvador, the numbers look stark. Debt has risen from $19.8bn to $24.4bn as Bukele’s administration spent millions of dollars to deal with the COVID-19 pandemic. The IMF estimates that the current account deficit for its remittance and external financing reliant economy will hover around $2bn through 2025.
Adopting Bitcoin set the country at odds against multilateral lenders such as the IMF which was said to be seeking $1.3 billion last year. The IMF has urged the country to drop Bitcoin and has made any credit line depending on addressing Bitcoin risks. On Wednesday, an IMF official said those risks included “those related to the adoption of bitcoin as legal tender as well as risks related to economic governance”.
Rating agencies have warned Bitcoin adoption could facilitate money laundering and bond investors have used Bitcoin’s risks to demand higher returns. On Wednesday, they were seeking a record-high premium of 2,445 basis points over US Treasuries. Bukele’s own moves to centralise power and remove all top judges to seek immediate re-election despite constitutional term limits have also increased risks. Without any innovative financing options or potential for Bitcoin growth dividends, the government will have to find other funding options.
The country has to service $329 million in interest due on its international debt this year as well as an $800million in a bond set to mature in January.
Possible financing options include Latin American Development banks – CABEI and CAF, respectively – which could possibly help it make the $800million payment in January or to nationalise the country’s pension fund which could be done by transferring the public’s savings to a government account.
However, with the current policy direction, experts believe debt refinancing to be inevitable.
(Writing by Tom Cropper, editing by Klaudia Fior)