Trading Bitcoin is only worsening El Salvador’s already weak sovereign credit outlook, according to Moody’s Investor Services.
Trading Bitcoin “is quite risky, particularly for a government that has been struggling with liquidity pressures in the past,” said Moody’s analyst Jaime Reusche. He added that the government’s current Bitcoin holdings “certainly add to the risk portfolio.”
El Salvador’s current owns an estimated 1,391 Bitcoin, which at current prices amounts to just under $60 million. This amount clearly does not pose a major risk to the government’s financial stability, but this could be jeopardized by even further purchases. “If it gets much higher, then that represents an even greater risk to repayment capacity and the fiscal profile of the issuer,” Reusche said.
While President Nayib Bukele has said that he buys Bitcoin through his phone, the government has published no official data on its holdings. In anticipation of El Salvador becoming the first country to accept Bitcoin as legal tender in September, Bukele first bought the cryptocurrency over the summer. Bukele then highlighted further purchases he made, buying the dip during successive drops in the price over the second half of last year. Moody’s estimates that El Salvador’s Bitcoin holdings could be down between roughly $10-20 million at current market prices.
Bitcoin & bonds
One particular reason for the concern is an $800 million bond El Salvador issued that will mature in January of next year. Because it is currently trading at 0.78 on the dollar, it has a high yield of over 35%, precluding the government from access to foreign bond markets.
According to Moody’s, all these factors, in conjunction with an incomplete deal with the International Monetary Fund, have added to El Salvador’s risk of defaulting. Last July, Moody’s downgraded El Salvador to Caa1, reflecting a “very high credit risk,” citing a “deterioration in the quality of policymaking.”
In spite of these appraisals, Finance Minister Alejandro Zelaya believes that the adoption of Bitcoin has attracted foreign investment to the country. Last week, he introduced bills into the country’s legislature that would provide a legal framework for the issuance of a $1 billion 10-year denominated bond with a coupon of 6.5% Issued via Blockstream’s Bitcoin settlement system known as the Liquid Network, the government intends to use the funds to further facilitate the country’s Bitcoin usage.
“A decent amount of Bitcoin bonds could potentially help them with their liquidity pressures,” Reusche conceded. However, “unless Bitcoin bonds are very well received and oversubscribed, we are seeing that the probability of the need to restructure their traditional market bonds is increasing.”