Critics Say El Salvador Could Default on Conventional Debts Before it Even Issues Bitcoin Bonds

Critics Say El Salvador Could Default on Conventional Debts Before it Even Issues Bitcoin Bonds

Concerns are being voiced that El Salvador could default on bond payments, with international critics claiming that President Nayib Bukeles experiment to grant bitcoin (BTC) legal currency status has hit a wall.

El Pas reported that BTC price drops have thrown the BTC adoption plans into uncertainty, and reported that government bonds are currently trading at 40% of their original value, as investors start to doubt whether the country can meet its next debt payment.

The next key date in El Salvadors diary is January 2023, when some USD 800m worth of bonds is due to mature.

Recent credit rating downgrades could spell more trouble for El Salvador, the report warned, explaining:

A credit rating of CCC, described as junk in the industry, prevents a country from accessing global markets to issue more debt.

Both Fitch and Moodys have downgraded to CCC in recent months. Experts have previously stated that the door is now closed on a possible International Monetary Fund (IMF) deal due mainly to BTC adoption policies.

Moodys recent report claimed that even if the government finds a way to manage near-term financing pressures from the upcoming 2023 bond maturity, it claimed that El Salvador will continue to face funding pressures that would compromise its ability to service its debt commitments in full.

Bloomberg, meanwhile, claimed that prices on Salvadoran foreign debt have fallen some 18% this year, leaving bonds due in 10 and 30 years trading at around 40 cents on the dollar, deep into distressed territory.

In something of a contrast from El Pas claims, it stated that a 22% price discount was now common for the bonds that expire in January 2023, but added that this suggests some hesitation from investors on whether the obligation will be met.

Bloomberg noted that El Salvador owes bondholders USD 382m in interest this year, with July being the heaviest month for payments as USD 183m comes due.

The nations central bank claims to have USD 3.4bn worth of reserves, as well as the BTC holdings.

However, Bloomberg claimed that spreads on the nations credit default swaps (a type of insurance against missed payments) have risen more than 20 percentage points, implying an 87% chance of a default in the next five years.

Pointing to Bloomberg and EMFI Analytics data, the Salvadoran media outlet La Prensa Grfica wrote that Bukeles government had bought BTC 2,301 for over USD 103m, representing a 35% loss in value.

Bukeles government plans to turn its economic fortunes around by investing more in BTC, and recently bought the dip with another bitcoin purchase. The country appears to be waiting on a larger crypto recovery before issuing its much-talked-about 10-year bitcoin bonds.

Meanwhile, humanitarian groups have hit out at Bukele over the governments heavy-handed war on the pandilla gangs that have waged open war on El Salvadors streets. Amnesty International has claimed that children aged between 12 and 16 are subject to prison sentences of up to 10 years as the crackdown continues.

Others have slated his handling of the countrys financial affairs. Bukele shrugged off such criticism, reposting a tweet he made in 2021, where he wrote:

One thing Ive always admired about Steve Jobs is that he never even looked at Apples stock price. He knew where his company was going. The stock market will follow when they understand. 1 bitcoin = 1 bitcoin.

Some claimed that this argument was moot, however, with one tweeting the response:

Yes, but [Jobs] was talking about a company not a country.

In either case, it seems that Bukele has somewhat distanced himself from Bitcoin:

Also on Twitter, an angry Bukele smarted at international criticism of his government, producing evidence to suggest that his measures have the full backing of the public.

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