- Salvadoran President Nayib Bukele decided to make bitcoin legal tender last year.
- The fall of the cryptocurrency has translated into losses.
- El Salvador must face an expiration of its debt in dollars.
El Salvador’s experiment of turning bitcoin into legal tender has a problem due to the collapse of the market generated by the armed conflict Russia-Ukraine, inflation and the increase in the interest rate of the US FED.
In that context, the crypto market in general and the price of bitcoin in particular plunged more than 48 percent from its maximum and, with them, the reserves of the Salvadoran government, which now they trade at 42 percent of the initial value.
Investment analysts and international market specialists predict a dark future: El Salvador will not be able to pay the next debt maturity.
El Salvador will not be able to pay the external debt for investing in bitcoin: default?
Debt rating agencies had already warned in 2021 about how the volatility of bitcoin could impact the finances of the Central American nation, whose economy is dollarized.
It must be remembered that in the second half of 2021, President Nayib Bukele made bitcoin legal tender, along with the United States dollar.
Since then, Bukele has been acquiring bitcoin with dollars from his reserves.
A note from Fitch Ratingscredit risk rating agency, said then that the adoption of bitcoin in a context of volatility and low financial inclusion of the banking sector of El Salvador and little connectivity It was dangerous for that country.
The International Monetary Fund also does not believe that Bukele will not be able to pay the next debt maturity in January 2023. In fact, he said that he will not help that nation if he does not eliminate cryptocurrency as legal currency.
Bukele refuses and the IMF stopped negotiating an aid package.
Junk bonds
All the rating agencies lowered the note of the Salvadoran debt this week, which further complicates the country’s finances to be able to take more credit to pay off future maturities.
In February, before this week’s crash, Fitch lowered El Salvador’s rating to its lowest level and said the outlook for the future is “negative.”
Moody’s, in May, did the same.
El Salvador must pay 800 million dollars in January, and today it has them, but in bitcoin, and they are worth less and less.
Fitch estimates that El Salvador’s liabilities will reach 86.8 percent of gross domestic product by the end of 2022, raising concerns about the sustainability of liabilities in the medium term.
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