El Salvador May Be in Trouble Over Bitcoin: Experts Speak Out

The sharp drop in Bitcoin has deeply affected El Salvador, which gained global attention by declaring BTC as its official currency.

President Nayib Bukele’s high-risk crypto strategy has caused volatility in the country’s debt markets and heightened investor concerns.

Bukele made history as the first leader to make Bitcoin a legal tender alongside the US dollar. Despite the recent sell-off, the president maintained his policy of buying “one Bitcoin a day.” However, the latest crash has resulted in hundreds of millions of dollars in losses in government crypto assets and complicated ongoing $1.4 billion loan negotiations with the International Monetary Fund (IMF).

Increased risk perception in financial markets is drawing attention. Investors have pushed El Salvador’s credit default swap (CDS) premiums to their highest level in five months. This indicates growing unease regarding the country’s crypto-focused strategy.

The country’s dollar-denominated bonds recorded the sharpest decline among emerging markets last week. However, some of the losses were later recouped in the wake of a general rally in emerging market debt.

According to investors, the main risk is the possibility of a confrontation with the IMF due to the government’s continued Bitcoin purchases and its delay in reforming the pension system. A breakdown in the IMF program could weaken one of the fundamental pillars of El Salvadoran bonds, which have stood out as a “success story” among emerging markets, delivering yields of over 130% in the last three years.

Christopher Mejia, emerging markets analyst at T Rowe Price, commented, “The IMF may object to the possibility of using loan tranches to purchase Bitcoin. Furthermore, Bitcoin’s decline is not easing investor concerns.”

The IMF stated that discussions on pension reform and Bitcoin purchases are ongoing, with a particular focus on better understanding the purchases and increasing transparency.

Bitcoin’s decline of more than 22% since the end of January has led to losses of up to 2.6 cents per dollar in El Salvadoran bonds maturing in 2035. In a broader context, Bitcoin has fallen 46% since its October peak.

According to Bloomberg calculations, the value of the country’s Bitcoin investments has decreased from approximately $800 million to around $500 million. El Salvador’s international reserves are at approximately $4.5 billion.

The second review of the IMF program has been on hold since September due to the government’s delay in publishing its analysis of the pension system. The third review, scheduled for March, is critical for loan repayments.

Related News: Bitwise CIO Shares What's Needed for Bitcoin and Altcoins to Exit the Bear Market

Jared Lou, a manager at the William Blair Emerging Markets Debt Fund, said, “Continued Bitcoin purchases create potential challenges in terms of IMF reviews. The market would react very negatively if IMF support were to disappear.”

However, it is noted that El Salvadoran bonds have formed a floor, and some bonds continue to trade above their face value. One reason for this is Bukele’s close relationship with the US administration. The US is the largest shareholder in the IMF.

Oppenheimer analyst Thomas Jackson commented, “The Bukele administration appears to be pushing the limits of the program by using its preferential relationship with the U.S.”

Some experts suggest that El Salvador could completely exit the IMF program and consider the US as an alternative source of financing. However, this scenario could mean the loss of one of the key pillars that have made investing in the country’s debt attractive in recent years.

El Salvador faces $450 million in bond payments this year. This amount is projected to rise to approximately $700 million next year. Furthermore, pension debt obligations are expected to reach 6% of GDP after April.

*This is not investment advice.

Continue Reading: El Salvador May Be in Trouble Over Bitcoin: Experts Speak Out