El Salvador’s $1bn Bitcoin bond is getting a cool reception
By Daniel Tyson
17:43, 29 November 2021
El Salvador's hope that Bitcoin can turn its debt-ridden economy around was met with resistance last week when the International Monetary Fund (IMF) questioned the country's president on his all-or-nothing gamble that the cryptocurrency will solve the Central American nation’s high debt and low bond rating.
The country’s dollar bond dropped significantly to 63.4 cents on the US dollar last week, the lowest in its history. While not due for another 29 years, its bond rating has been among the globe’s worst performing due to the nation’s billions of dollars of debt.
The bond sank further when, at a cryptocurrency conference in El Salvador, President Nayib Bukele announced the country's plans to sell sovereign bitcoin bonds, which caused concern with officials from the International Monetary Fund (IMF).
“Given Bitcoin's high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability,” the IMF said in a statement after concluding a monitoring mission to El Salvador on 20 November.
El Salvador’s debt is in distressed territory, with investors currently demanding 1,202 basis points in extra yield to hold its dollar bonds over US Treasuries, according to JPMorgan Chase data.
El Salvador has used the US dollar as its currency for 20 years, but in September, it became the first country in the world to use bitcoin as legal tender. Since that time, the government has purchased $75m in bitcoin, but the cryptocurrency has failed to catch on with Salvadorans, both in country and abroad.
The announcement came with little information. Since his statement, Bukele, a prolific Twitter user, has said or tweeted little on the topic.
What is known comes from Samson Mow, chief strategy officer at Blockstream. At the conference he said the 10-year token Bitcoin bond is forecast to pay 6.5% yearly with an added dividend of 50% of any bitcoin gain, after the country recoups its initial investment. The dividends will be paid in either US dollars or Tether, a stablecoin.
A prospectus is expected once the legislatures in El Salvador pass measures allowing the new bond. No timeline was given for a vote or the issuance of a prospectus.
Advocates for bitcoin bonds said it would help the country, which has billions of dollars in debt. Its next big due date for external creditors is not until 2023. The $1bn in the token bond would give the government a bit of breathing room, as negotiations with the IMF for a $1.3bn loan has stalled. A token bond would add uncertainty and risk.
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Analyst on the bond
The Bitcoin bond perhaps is a signal El Salvador is serious about financing its own growth, said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities.
But, “Innovative financing is not in itself a solution,” she wrote in a note last week.
During his appearance at the cryptocurrency conference, Bukele outlined the country’s plan for the $1bn bond. Half would purchase bitcoin and the other half would be used to build Bitcoin City, a metro in El Salvador dedicated to bitcoin. It would have shops, homes and eateries. A volcano would generate power and there would be no taxes, except a value added tax (VAT).
Relations between the IMF and El Salvador have headed south since Bukele’s party took control of the legislature in May. Since then, the assembly has fired five top judges, the attorney general and adopted bitcoin as legal tender.
The Washington, DC-based IMF said the country using bitcoin raises, “fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender.”
It recommended “narrowing the scope of the Bitcoin law” that made it official currency and urged “strengthening the regulation and supervision of the new payment ecosystem.”