CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

Fitch cuts El Salvador debt to ‘CCC’ as funding gap looms

By Kevin Donovan

16:24, 10 February 2022

El Salvador flag and bitcoin
El Salvadors adoption of Bitcoin as legal tender holding up needed loan - Photo: Shutterstock

Fitch Ratings downgraded the long-term foreign currency Issuer Default Rating (IDR) of El Salvador to ‘CCC’ from ‘B-’ overnight, citing a funding gap for debt maturities coming due in the second half of 2022.

Fitch credit rating scaleFitch credit rating scale - Fitch Ratings
  • Fitch’s ‘CCC’ rating, seven notches above Restricted Default, is defined as “Very low margin for safety. Default is a real possibility.” Standard & Poor’s currently has a ‘B-’ rating on El Salvador’s sovereign debt and Moody’s rates El Salvador at ‘Caa1’.
  • In the credit rating agency’s view, the Central American country’s ability to access an International Monetary Fund (IMF) loan needed to meet nearly $1.3bn (£960m) in debt due in August through October is uncertain, in part, to the adoption of Bitcoin as legal tender, which the IMF opposes.
  • Overall financing needs will increase to $5.4bn by 2023, including a $800m Eurobond due in January 2023, creating a nearly $2.5bn funding gap, Fitch added.

  • The government has been in extended discussions with the IMF for nearly a year for a possible $1.3bn three-year programme; however, there are important differences between the two sides in many key areas, in Fitch's view. A deal would help cover the government's financing gap and likely unlock other multilateral loans.”

"The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities" ~ IMF Executive Board Concludes 2021 Article IV Consultation with El Salvador
  • In order to access IMF funding, El Salvador needs to improve governance in reporting and audits, implement anti-money laundering laws and remove Bitcoin as legal tender while improving oversight of its virtual currency system, the IMF said in its recent Article IV Consultation with El Salvador.

  • “The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection,” the IMF report said. “It also can create contingent liabilities.”

  • El Salvador’s access to liquidity is limited, Fitch notes, as it has issued nearly $3bn in Letes and Cetes and is restricted from issuing more due to legal constraints, as well as “local private pension funds and banks have limited appetite for increasing their exposure to such instruments.”

  • External financing options are also limited due to prohibitively high borrowing costs in the international bond markets, topping 15%. El Salvador’s recent debt offerings have not been fully subscribed.

Bitcoin bond offering

El Salvador has previously announced plans to offer a $1bn 10-year bond backed by Bitcoin, which would pay a 6.50% coupon plus a dividend of 50% of any gains in the cryptocurrency, as previously reported. Coupon payments would be made in either US Dollars or the stablecoin Tether.

The country’s president, Nayib Bukele recently outlined the proceeds of the potential Bitcoin-backed bond, half of which would purchase Bitcoin with the other half funding the development of a tax-free Bitcoin City within El Salvador that would be powered by a volcano.

The Bitcoin bond offering is tentatively scheduled for next month, Finance Minister Alahandro Zeleya said on local television programme ‘Frente a Frente’.

Related topics

Rate this article

Related reading

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents and has not been prepared in accordance with the legal requirements designed to promote investment research independence. While the information in this communication, or on which this communication is based, has been obtained from sources that Capital.com believes to be reliable and accurate, it has not undergone independent verification. No representation or warranty, whether expressed or implied, is made as to the accuracy or completeness of any information obtained from third parties. If you rely on the information on this page, then you do so entirely at your own risk.

Still looking for a broker you can trust?

Join the 610,000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading