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El Salvador’s bitcoin bet put new pressure on the country’s debt market after investors started selling its bonds earlier this year amid growing concerns over President Nayib Bukele’s government.
On the first day of El Salvador’s pioneering adoption of bitcoin as legal tender, the global cryptocurrency price fell by more than 10%. Undeterred, Bukele tweeted that his small Central American nation had increased its holdings. “Buy the dip. 150 new parts added. #Bitcoinday, ”he wrote, adding a blinking emoji.
Bond traders were not impressed. A new round of selling this week pushed the yield on long-term Salvadoran dollar-denominated debt to nearly 11 percent while shorter maturities offered up to 14 percent. Before Bukele announced the crypto move in June, Salvadoran long-term yields were around 8.5%.
Another sign of tension in the markets, the yield curve for Salvadoran bonds inverted on Tuesday, which meant that the price of short-term debt was lower than that of long-term debt. “That in itself is never a good sign,” said Dean Tyler, head of global markets at BancTrust. “It shows that people are starting to question the viability of the shorter end of the curve.”
Investors weren’t convinced by the risky and expensive bet on bitcoin of one of the poorest countries in the Western Hemisphere with an annual GDP of $ 25 billion. The coin’s value has gone from $ 10,000 to $ 64,000 in the past year, and is now down to $ 46,000. Bukele’s rushed plan to introduce the volatile digital asset for daily trading has made headlines around the world.
“If I told you that I am now going to pay your salary in bitcoin, you would have a lot of questions,” said Michael Schlein, CEO of Accion, a nonprofit that invests in technology for financial inclusion. “The notion of the poor keeping their savings in crypto is absurd. It’s extremely volatile and you’re talking about the most vulnerable people in the world.
But traders said the latest drop in Salvadoran bond prices was not just due to nerves over what could turn out to be a reckless crypto bet; fund managers are also troubled by the president’s attempts to increase his power.
Late Friday night, the Salvadoran Supreme Court ruled that the president could run for a second consecutive term – a move condemned by the United States. It comes months after the Bukele-controlled congress sacked five Supreme Court justices and replaced them with loyalists.
“The market had taken in the bitcoin news,” said Kevin Daly, chief investment officer at Aberdeen Standard. “The news that really rocked the market was [Bukele’s] gerrymandering things to run for re-election. “
This, he said, pushed the risk premium demanded by investors to hold Salvadoran debt to the highest level of any solvent emerging market.
Siobhan Morden, head of fixed income for Latin America at Amherst Pierpont, said the court ruling made it harder for El Salvador to accept a new IMF program and ensure access to external funds including its economy. dollarized is badly needed.
“It’s all about the Bukele risk premium,” she said. “It’s all centralized decision-making and he’s not surrounded by a team of top-notch technocrats.”
The IMF has opposed the adoption of bitcoin as legal tender, citing risks to financial stability, consumer protection and the environment.
“The most direct cost of widespread adoption of a crypto-asset such as Bitcoin is for macroeconomic stability. . . Monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency, ”he wrote in July.
“Without strong anti-money laundering and anti-terrorist financing measures, crypto-assets can be used to launder ill-gotten money, finance terrorism and evade taxes,” he added.
El Salvador needs $ 3.5 billion to $ 4 billion in foreign funding per year to finance its deficit, cover the costs of managing the pandemic, and roll over existing debt. The government has said that introducing bitcoin as legal tender will initially cost around $ 200 million.
It last issued a bond in July 2020 but has not been able to tap the market since, Morden added. “Bukele still has a budget deficit of about double the pre-Covid level and debt represents 90% of GDP.”
With a significant debt repayment of $ 800 million looming in January 2023, Bukele has limited leeway. Morden said that a recent increase in the country’s Special Drawing Rights allocation to the IMF – a reserve asset that allows the lender to top up the official reserves of member countries – would provide short-term relief, but after that, the government could be forced to turn to its own account. citizens to finance themselves.
“Locals are the lenders of last resort,” she said. “But if they are unwilling to lend, there may be a shift towards coercive lending,” such as the potential nationalization of private pensions, or even capital controls.
Or, as Daly put it, “There is a real risk that it will all end in tears. “