The plunging value of bitcoin has hurt investors in cryptocurrency everywhere. The stakes are especially high in El Salvador, the indebted Central American country whose president has spent hundreds of millions of dollars in taxpayer money buying bitcoin and rolling it out as a national currency.
The country’s planned placement of an exotic $1 billion bond that bets on a rise in bitcoin’s value has stalled, according to the country’s officials, and the market value of El Salvador’s $100 million in bitcoin holdings has dropped by about a third, squeezing the country’s finances further and raising the odds that it will default on its more than $24 billion in sovereign debt, economists say.
The administration of President
has pledged to meet the country’s debt payments. Since a sovereign default could hamper Mr. Bukele’s potential re-election ambitions, “the government will do everything in its power to avoid it,” said former central bank governor Carlos Acevedo.
To avoid a default, El Salvador needs hard currency to pay for imports like oil and make an $800 million bond payment in January. Economic turmoil risks sparking a fresh wave of migrants to the U.S. One in four Salvadorans live abroad, mostly in the U.S., and about three of every 10 dollars in the country’s economy come from remittances.
Since the impoverished nation adopted the dollar as its national currency two decades ago, El Salvador can’t print its own money to pay bills or boost spending, meaning it has to cut its own spending or borrow more to make ends meet. Instead, the president has kept spending at high levels and invested the country’s money into bitcoin, a volatile asset widely seen as speculative, according to the International Monetary Fund, which acts as lender of last resort to countries facing debt crises.
“The president seems rudderless in terms of economic policy-making, and as a consequence, El Salvador is sleepwalking into a potential sovereign default crisis,” said Frank Muci, a fellow at the London School of Economics who does research on El Salvador. “The signal you are sending (by embracing bitcoin) is that you have no idea what the country’s priorities are and what to do to get out of the hole.”
A spokesman for Mr. Bukele didn’t respond to requests for comment on the criticism of his policies.
El Salvador’s debt is among the worst performers in emerging markets this year. Its sovereign bond due in 2032 is trading around 40 cents on the dollar, while the bond due in January is trading at less than 80 cents on the dollar with a yield close to 50%, indicating market concerns it may not be repaid.
Early this month, Moody’s Investors Service cut El Salvador’s debt rating to Caa3, deep into junk territory. It noted an “increased probability of a credit event—restructuring, distressed exchange, or default—with relatively high severity.”
El Salvador’s Finance Minister Alejandro Zelaya said early this month that the bitcoin bond had been delayed because of the cryptocurrency’s drop in value. “For some investors this discourages the bond’s purchase,” he told reporters.
So far, there are no indications that Mr. Bukele plans to change course. On Monday, he said on Twitter that El Salvador bought 500 bitcoin at an average price of $30,744. “El Salvador just bought the dip!” he added. Bitcoin traded at $29,745 on Friday.
Mr. Bukele also posted photos of himself supervising the layout of “Bitcoin City,” a mining hub and tax haven for crypto entrepreneurs that is to be developed using funds from the bitcoin bond.
Negotiations with the IMF on a $1.3 billion aid loan stalled last year because of Mr. Bukele’s surprise decision to make bitcoin legal tender and other measures that the U.S. government saw as an effort by Mr. Bukele to cement power by weakening institutions and the rule of law. As bilateral relations with the U.S. deteriorated, El Salvador lost key political backing at the IMF to secure a bailout.
An IMF official said large fiscal deficits and rising global interest rates are contributing to investor pessimism about El Salvador’s capacity to repay its debt. Both sides are still in discussions to reduce the country’s budget gap and indebtedness, and minimize risks from the country’s adoption of the virtual currency. Early this year, the IMF urged El Salvador to strip bitcoin of its status as legal tender because of its risks to financial stability.
Any bailout now seems a distant possibility, said
director of the Georgetown Americas Institute in Washington, D.C., and a former director of the IMF’s Western Hemisphere Department.
“It’s difficult to get support in a relatively short period if you carry out very heterodox public-policy strategies without consulting the international community,” he said.
Some hedge funds that had been willing to help the country refinance its debt also got cold feet when Mr. Bukele began investing in bitcoin and the IMF said it was uncomfortable with the speculative investments, said Phil Torres, a senior portfolio manager at Aegon Asset Management specializing in emerging markets.
“A lot of people said this is bad leadership and said they aren’t going to back these bonds,” he said.
The spokesman for Mr. Bukele also didn’t respond to requests for comment on the bonds.
The use of bitcoin as the national currency in this country of 6.5 million hasn’t taken off, surveys show. After the government spent more than $200 million rolling out bitcoin ATMs and an e-wallet with $30 worth of free bitcoin for anyone who signed up, most users took the free virtual currency to buy goods or exchange it for dollars.
“Bitcoin was supposed to save the country from economic stagnation, but instead it’s causing harm because no one really uses it and the government keeps spending money to buy more of it,” said Fernando Mejía, a young graphic designer in San Salvador, the country’s capital. “We are just digging deeper into debt.”
In less than three years, the Bukele administration has taken on more than $5 billion in debt in a tiny economy of about $28 billion, pushing public debt up to nearly 86% of gross domestic product. The budget deficit was equal to 5.6% of GDP last year, and is expected to be as big this year, economists say.
Economists say the country could tap loans from regional financial institutions. It can also take some funds from the central bank, where most reserves are deposits from savers, or take cash from a planned overhaul of the pension system.
But increased use of domestic funding could risk the stability of the local banking system and jeopardize the country’s use of the dollar as national currency,
said in a recent note to investors.
—Alexander Gladstone contributed to this article.
Write to Santiago Pérez at [email protected]
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