El Salvador’s bet on bitcoin has already cost it to the government enough to cover your next interest payment to bondholderswhich shows the great risks posed by his experiment with cryptocurrency.
(Read: Bitcoin erases its 2022 gains and falls below $30,000)
The pullback that has seen bitcoin fall 40% since the end of March has deepened the cumulative losses of President Nayib Bukele’s government holdings to nearly $40 million, according to an estimate from Bloomberg.
(You are interested in: What is ‘crypto winter’ and why has bitcoin lost half its value)
That’s slightly more than the next coupon payment on its foreign debt, $38.25 million due June 15 in notes due 2035.
Bukele’s government has spent around $105 million buying bitcoin since becoming the first country in the world to convert the token into legal tender in September, according to his Twitter announcements.
Since the first purchase, the cryptocurrency has fallen 45%, reducing the value of the country’s 2,301 bitcoins to about $66 million.. That’s another blow for Bukele, a devout crypto believer who has been trying to sell a bitcoin-backed bond for more than five months.
However, investors have been lukewarm about El Salvador’s bonds, concerned not only about the government’s ability to keep up with its debt, but also about its willingness to do so.
Bukele’s office declined a request for comment from BloombergNews.
The government does not publish data about your bitcoin holdings.
The prices of the country’s external debt fell by around 18% this yearwhich left 10-year and 30-year bonds trading at around 40 cents on the dollar, in distressed territory.
The next capital payment is in January for USD $800 million. The 22 percent discount in the price at which the notes are trading suggests some hesitation on the part of investors about whether the obligation will be met.
El Salvador owes bondholders $382 million in interest this year, with July being the heaviest month for payments as $183 million is due.
In April, the nation had $3.4 billion in reserves, according to the central bank, and the government plans to raise $1 billion with the bitcoin-backed bond, though it is unclear at this point if the transaction will go ahead.
The country was also in talks with the International Monetary Fund for an expanded funding facility, but negotiations stalled after Bukele adopted cryptocurrency as legal tender.
Since then, the spreads of the credit default swaps of the nation, a type of insurance against late payments, have increased more than 20 percentage points, implying an 87% probability of default in the next five years.
a new bet
The president of El Salvador, Nayib Bukele, renewed his faith in bitcoin with the purchase of 500 cryptocurrencies, despite the warnings from the risk rating agencies of the possibility of non-payment of 800 million in 2023 and the stagnation of negotiations with the International Monetary Fund (IMF) to obtain funds.
In addition, according to an economist consulted by Ephthe country would need financing for more than 3,000 million dollars to cover its budget gaps and the payment of debt in the coming years.
Bukele put into practice one of the maxims of bitcoin enthusiasts: buy when the price drops. “El Salvador just bought the fall!” He announced on Twitter, the only official channel in which the Salvadoran government’s movements with bitcoin are known, adding that the 500 coins were bought at an average price of $30,744.
El Salvador just bought the dip! 🇸🇻
500 coins at an average USD price of ~$30,744 🥳#bitcoin
– Nayib Bukele (@nayibbukele) May 9, 2022
This purchase occurred at a time of weakness of the most popular cryptoactive and considered a refuge of value.
The economic effects of the Russian invasion of Ukraine, high inflation and the increase in interest rates caused its value to fall by more than 50% on Monday from its historical maximum reached in October.
El Salvador became in September 2021 the first country in the world to give legal tender to bitcoin and this adoption was placed as Bukele’s main economic bet.
With this new purchase, which exceeded 15.3 million dollars, El Salvador’s bitcoin reserves reached 2,301 bitcoins with a purchase value of more than 100 million dollars. However, this wallet of bitcoins from El Salvador at the price registered on Wednesday morning is close to 71 million dollars.
This purchase occurred after Bukele had displaced the topic of bitcoin for several days on his social networks for that of fighting gangs and while the placement of 1,000 million dollars in bonds backed by this cryptocurrency has been questioned.
It’s a bit like sending a message to your community, but more almost like to your sect, that the projects continue as they are, that we’re going to go all the way and that everything is going to be fine.
In the opinion of the economist Ricardo Castañeda, of the Central American Institute for Fiscal Studies (Icefi), this purchase resembles “an act of faith.”
He added that, being public funds, each purchase “It has a very high opportunity cost.given that “they represent resources that are not going to be used, for example, to improve schools, that are not going to be used to buy more medicine.”
“The costs of this type of decision sooner or later end up being paid by the population,” he stressed.
The same day that the president announced the purchase of the 500 coins, he presented on social networks a model of what would be the first bitcoin city.
This project, announced in 2021, would be financed with the bitcoin bonds that the Government intends to place through a public company and with a sovereign guarantee, according to the Minister of Finance, Alejandro Zelaya.
The placement was expected to take place last March, but was postponed, according to Bukele, to prioritize a reform of the pension system.
The interannual rate of inflation in El Salvador in April of the current year was 6.5%, two tenths less compared to Marchaccording to figures from the Central Reserve Bank (BCR) consulted this Wednesday by Efe.
The data from the financial institution, hosted on its web portal, indicates that the inflation registered in April alone was 0.50%, lower than the 0.81% computed in March, and the accumulated figure for 2022 reached 2.74%.
The General Directorate of Statistics and Censuses (Digestyc), dependent on the Ministry of Economy, has not yet published its figures for the consumer price index for April.
In March, the institution indicated that the increase in prices was “motivated by a higher rate of variation in prices in general, which contributes to maintaining a higher level of inflation” than the same month in 2021, when the accumulated was 1 .68% compared to 2.23% in 2022.
To try to reduce the effects of the global economic crisis, the Legislative Assembly of El Salvador approved a law to freeze fuel prices during April and May.
The Government, which presented this initiative, hopes that 1.2 million drivers will benefit, in addition to the supply chain, the transport of food and merchandise, among others.
The economy of this Central American country is dollarized and the behavior of its inflation was similar to that of the United States, which moderated slightly in April, standing at 8.3% year-on-year, two tenths less than in March.
*With information from EFE, AFP and Bloomberg
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