El Salvador, in brief: The fall in the price of bitcoin underscores El Salvador’s precarious debt crisis, according to financial experts. President Nayib Bukele, nonetheless, perseveres: on Monday, May 9, he announced a new $15 million state purchase of bitcoins and, ignoring those predicting a default, bragged about his model of the Bitcoin megaproject. City, libertarian tax haven and crypto-currency paradise. in the Gulf of Fonseca.

“Risky Shark Mindset”

On May 9, President Bukele announced that he had purchased 500 bitcoins, the latest move casting doubt and controversy over El Salvador’s public finances. If true, he has now purchased a grand total of 2,300 – from his cell phone, he says – since the Bitcoin law passed in September.

“El Salvador just bought the dip,” he tweeted, referring to bitcoin trading at $30,700, the lowest point since July. Two days later it was down to $26,000, but by Friday it was back to $30,000. London-based financial research firm EMFI and Bloomberg estimated that the government had lost 35%, or $36 million, of its highly publicized and controversial $103 million investment in public funds in less than a year. .

“Salvador has not yet announced a default, but its bonds are trading as if they have,” EMFI wrote on May 5. Over a five-year horizon, international credit assessors say that, unless the market signal from an International Monetary Fund (IMF) agreement, the insolvency risk jumps to 87 percent. Bitcoin losses represent less than one percent of El Salvador’s tax revenue, although EMFI in a Thursday note titled “Risky Shark Mindset” notes that “every cent counts due to current funding constraints. “.

The country needs to find $2.1 billion to meet its financial obligations this year and, in addition, repay $800 million in Eurobonds due in January. The government is seeking a range of loans from international lenders, including the Central American Bank for Economic Integration and the Andean Development Bank of Latin America (CAF).

“El Salvador’s tax problems do not come from bitcoin, but it is true that it [the Bitcoin Law] contributed to the deterioration of the country’s risk profile,” Ricardo Castaneda, an analyst at the Central American Institute for Fiscal Studies, told El Faro English.

The top three US-based credit assessors have rated El Salvador as riskiest in Central America. Fitch Ratings cited the Bitcoin Law, as well as “weakening of institutions and concentration of power in the presidency,” in its assessment.

“If El Salvador were considering issuing bonds now, assuming someone would buy, they would have to pay 25-26% interest,” Castaneda continued, “whereas a year ago they would have paid around 7%”.

Debt refinancing negotiations with the IMF seem to have stopped, but the Bukele administration denies any claims of troubled waters. Treasury Minister Alejandro Zelaya has repeatedly asserted that El Salvador faces “zero” “risk of default and that risk assessors”does not measure reality.”

“Some keep talking about the country’s risk profile, but in two years we have demonstrated that El Salvador is undergoing a historic economic transformation,” he added. the minister said in March, adding: “Past governments never planned for the future. Our job is to plan our tax liabilities, which are all covered.

#Bitcoins The city is progressing wonderfully ❤️ pic.twitter.com/A6ay8aAREW

—Nayib Bukele (@nayibbukele) May 9, 2022

Hours before his last bitcoin purchase, Bukele unveiled a gold-colored circular model of Bitcoin City, a municipality exempt from income, property, and capital gains taxes and shaped like a circle with a bitcoin sign in the middle. . He promises to build the city at the foot of the volcano Conchagua, in the eastern coastal department of La Unión. Such an investment of public funds would also involve large-scale improvements to rural roads and highways, as well as a new airport.

He didn’t explain where he would get all the money for the project, but said he would partially fund construction with $500 million in “volcanic connectionsdenominated in dollars that the administration will convert into bitcoin. He announced the bonds in November and suggested they could be ready in 60 days, but delayed their issuance indefinitely, citing war in Ukraine, slowing global markets and a nationalization of repos that would open up another pocket of cash. to finance the government.

Since beginning his political career as mayor of Nuevo Cuscatlán, Bukele, a former publicist, has shown a penchant for promising megaprojects and racking up debt, notes Gabriel Labrador of El Faro in the first complete profile Of the president. In his first 21 months as the city’s mayor, for example, he took on as much debt as the city’s previous five-year average. Nuevo Cuscatlán, located on the outskirts of the capital, is now the only city to refuse to publicly disclose information on municipal debt.

Electoral calculation

According to EMFI, some market analysts believe the administration is seeking to avoid a major credit incident before the start of the election season next year as the 2024 election approaches.

Analysts like former Central Reserve Bank President Carlos Acevedo believe the government is low chance of default ahead of the election by tapping into a combination of international loans, foreign exchange reserves and the country’s struggling pension fund. El Salvador also joined Caracas-based CAF on March 10 and could negotiate additional short-term funding.

“What Minister Zelaya does not understand or is afraid to understand is that the greatest risk facing the government is at the Casa Presidencial and has a Twitter account with over three million followers,” writes the journalist. Salvadoran and Cal State Fullerton scholar Ricardo Valencia in a column for English El Faro.

“There are those in international finance who suspect that if Bukele is unconstitutionally re-elected in 2024, he could unilaterally rewrite the terms of the debt, or decide not to pay in full,” Valencia adds. “Bukele would have the perfect cast of scapegoats: the multilateral financial organizations, the US government and the political opposition.”

Thursday Bukele retweeted his own post last June, the day after he announced that he would make bitcoin legal tender: “One thing I’ve always admired about Steve Jobs is that he never even looked at the stock price of ‘Apple. He knew where his business was going,” he wrote. “The stock market will follow, when they understand.”

This is not the message of someone about to cut their losses in the bitcoin arena.

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