Analysis: Crypto crash leaves El Salvador with no easy exit from worsening crisis

File Photo-A sign stating “Pay here with Bitcoin” was installed at a furniture store in San Salvador, El Salvador, on March 10, 2022.Reuters / Jose Cabesus

San Salvador / New York, May 19 (Reuters)-El Salvador’s big bet on Bitcoin, which Central American countries have been buying since September, is that cryptocurrency routs exceed one-third of the government’s holdings So sour in the last few weeks, Reuters calculations show.

Under President Najib Buquere, a popular currency voice cheerleader, El Salvador fully participated in Bitcoin and was not only the first fiat currency in the world to be adopted, but also a volcanic-powered cryptocurrency. I sketched the plan of the mining hub I will issue the first sovereign bond linked to the coin.

With rising global borrowing costs and impending debt repayment, El Salvador has financial problems other than the effects of the currency plunge. However, the crypto slump has also closed some potential off-ramps from the crisis, including Bitcoin bonds that are currently postponed.

“The government’s financial problems aren’t due to Bitcoin, but they are exacerbated,” said Ricardo Castaneda, senior economist and country coordinator at Think Tank Central American Institute for Fiscal Studies (ICEFI) El Salvador and Honduras. I am. For the government, he said, “Bitcoin is no longer a solution, it’s part of the problem.”

Since El Salvador officially adopted Bitcoin in early September, Bitcoin has fallen 45%, down 26% from its May highs as crypto assets have been wiped out in a risk-off investment environment.

Based on CoinMarketCap data, the total market value of all cryptocurrencies has recently dropped to $ 1.2 trillion, less than half of last November.

El Salvador’s debt has risen from $ 19.8 billion at the end of 2019 to 24.4 billion as of December, after the Buquere administration has allocated millions of dollars to deal with the COVID-19 pandemic and its economic implications over the past few years. It became a dollar.

The International Monetary Fund predicts that the economy’s current account deficit, which relies on remittances and external funding, will be close to $ 2 billion by 2025.

However, by adopting Bitcoin, we have set the country for loggerhead turtles that have multilateral lenders like the IMF. Said Last year, the government was asking for $ 1.3 billion.

The fund recommends that El Salvador throw away Bitcoin altogether. IMF officials said Wednesday that credit line transactions need to address risks such as “risks associated with the adoption of Bitcoin as fiat currency and risks associated with economic governance.”

Rating agencies have warned that Bitcoin adoption may facilitate money laundering, and importantly, Bitcoin risk gives bond investors another reason to demand high returns. increase

As of Wednesday, they were looking for a record premium of 2,445 basis points on US Treasuries. (.JPMEGDELSR)..

Bukere’s move to centralize power is a risk premium, ranging from dismissing all Supreme Court judges in the state’s Supreme Court to the confusion over permission to seek immediate re-election despite constitutional term restrictions. Helped to increase.

“If there is no potential for Bitcoin growth dividends or innovative Bitcoin financing, the Bukere administration needs to prioritize spending priorities and identify funding options,” said Amherst Pierpont’s Latin America. Siobhan Morden, Head of Bond Strategy, said.

Reuters’ calculation of Bitcoin’s $ 36 million paper loss is sufficient to make at least part of the payment for these coupons and is based on Bukele’s tweets and price estimates on the date of purchase. The government spent about $ 104.2 million on 2,301 coins using Wednesday’s volume-weighted average price and is now worth only $ 67.9 million.

The country will have to pay $ 329 million interest on this year’s international bonds and $ 800 million on bonds that mature in January.

Castaneda of ICEFI lists funding options, including Central American and Latin American development banks (CABEI and CAF, respectively), as possible patches to fund the $ 800 million payment to be paid in January. rice field. Another option is to nationalize the national pension fund to make up for the budget deficit. This can be done by transferring national savings to a government account.

El Salvador’s debt restructuring is “unavoidable” if the country continues its “current policy mix,” said Polina Kurdyavko, Head of Emerging Markets for BlueBay Asset Management. “El Salvador’s debt could be sustainable with an appropriate (IMF) program, but they must act now.”

Zeraya, the state’s finance minister, declined to comment on the story.

Salvador bonds are trading between 43.5 and 34 cents for $ 1, except for a January maturity of 75 cents, reflecting cautious optimism that the country can make its payments. doing.

According to S & P Global data, the cost of insuring investors against Salvador’s sovereign defaults in the next five years on Wednesday reached its highest level since 2020.

Report by Nelson Renteria in San Salvador, Sarah Kinocian in Mexico City, Rodrigo Campos in New York Additional report by Giorgelina de Rosario in London Edited by Christian Plum and Matthew Lewis

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