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After investors began selling their bonds earlier this year due to growing concerns about the government of President Nayib Bukele, El Salvador’s Bitcoin strategy put new pressure on the country’s debt market.
on the first day El Salvador takes the lead in adopting Bitcoin As legal tender, the global price of cryptocurrency has fallen by more than 10%. Booker was not deterred. He tweeted that his small Central American country had increased its holdings. “Buy the dipping sauce. Added 150 new coins. #Bitcoinday,” he wrote, adding a winking emoji.
Bond traders were not impressed. This week’s new round of selling has pushed the yield of long-term Salvadoran bonds issued in U.S. dollars to close to 11%, while short-term bonds have yields as high as 14%. Before Bukele announced the cryptocurrency initiative in June, El Salvador had a long-term yield of approximately 8.5%.
Further signs of market pressure are the inverted yield curve of Salvadoran bonds on Tuesday, which means that short-term debt is priced lower than long-term debt. “This in itself has never been a good sign,” said Dean Taylor, head of global marketing at BancTrust. “This shows that people are starting to question the feasibility of the shorter end of the curve.”
As one of the poorer countries in the Western Hemisphere, with an annual GDP of 25 billion U.S. dollars, investors do not believe in the risks and expensive bets of Bitcoin. The value of the coin fluctuated from US$10,000 to US$64,000 in the past year, and now it has fallen back to US$46,000. Bukele’s hasty plan to introduce unstable digital assets into daily transactions has made headlines around the world.
“If I tell you that I am going to pay your salary in Bitcoin now, you will have a lot of problems,” said Michael Schlein, the CEO of Accion, a non-profit organization that invests in technology to achieve financial inclusion. “The idea of poor people depositing their savings in cryptocurrencies is ridiculous. It is very unstable, and you are talking about the most vulnerable people in the world.”
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But traders said that the latest plunge in El Salvador’s bond prices was not only due to nervousness over what might prove to be a reckless crypto gamble; the president’s attempts to increase his power also bothered fund managers.
Late Friday night, the Supreme Court of El Salvador ruled that the president can seek a second consecutive term-a decision condemned by the United States.A few months after the conference controlled by Booker Fired five Supreme Court justices And replace it with allegiance.
“The market has digested the news of Bitcoin,” said Kevin Daly, investment director of Aberdeen Standard. “The news that really shocked the market was [Bukele’s] Arguing for re-election. “
He said this pushes the risk premium required for investors to hold Salvadoran bonds to the highest level of any solvent emerging market.
Siobhan Morden, head of Amherst Pierpont’s Latin American fixed income division, said the court’s ruling complicates El Salvador’s chances of agreeing to the new IMF plan and ensuring its dollarized economy receives much-needed external funding.
“It’s all about the Bukele risk premium,” she said. “It’s all centralized decision-making. There is no first-class technocratic team around him.”
The International Monetary Fund opposes the use of Bitcoin as legal tender on the grounds that it poses risks to financial stability, consumer protection and the environment.
“The most direct cost of widespread adoption of crypto assets such as Bitcoin is macroeconomic stability… Monetary policy will lose its effect. Central banks cannot set interest rates for foreign currencies,” it said. Written in July.
“Without strong anti-money laundering and counter-terrorism financing measures, encrypted assets can be used for money laundering, terrorism financing and tax evasion,” it added.
El Salvador needs US$3.5 billion to US$4 billion in foreign funds each year to cover its deficits, pay for the pandemic and extend existing debts. The government has stated that the introduction of Bitcoin as legal tender will initially cost approximately US$200 million.
Morden added that the last time it issued bonds was in July 2020, but it has not been able to enter the market again since. “Bukele’s fiscal deficit is still about twice its pre-epidemic level, and debt accounts for 90% of GDP.”
As the huge debt of 800 million US dollars is about to be repaid in January 2023, Bukele has limited room for maneuver. Morden said that the country’s recent addition of special drawing rights (a reserve asset that allows lenders to replenish member states’ official reserves) will provide short-term relief, but after that, the government may be forced to turn to itself Of citizens raise their own funds.
“The locals are the lenders of last resort,” she said. “But if they are unwilling to lend, they may turn to compulsory lending.” For example, they may nationalize private pensions or even capital controls.
Or, as Daley said: “It all ends in tears. This is a real risk.”