El Salvador Weekly: Bond Buyback Hopes to Stem Bitcoin-Related Default Fears

El Salvador will buy back $1.6 billion worth of its sovereign bond, hoping to pull its highly discounted debt out of deep junk territory and reassure the market that it won’t default.

The country’s 2025 bonds, which were selling near 35 cents on the dollar before the announcement, rose to just under 50 cents, the Financial Times reported.

El Salvador President Nayib Bukele’s widely unpopular experiment of making bitcoin a legal tender alongside the U.S. dollar isn’t the only reason for its plunging debt, but it has had a big impact, angering the International Monetary Fund (IMF) and scaring off bond rating agencies.

On July 26, he tweeted that he was sending bills to congress that would “ensure that we have the available funds to make a transparent, public and voluntary purchase offer to all the holders of Salvadoran sovereign debt bonds from 2023 to 2025 at whatever the market price is at the time of each transaction.”

Bukele also lambasted the international press for publishing “hundreds of articles” warning of impending default.

“Contrary to what the media has been saying all this time, El Salvador has the liquidity not only to pay all of its commitments when they are due, but also purchase all of its own debt (till 2025) in advance,” he said.

Finance minister Alejandro Zelaya said purchases would be funded by tapping existing special drawing rights from the IMF, as well as $200 million from the Central American Bank for Economic Integration, the Financial Times reported.

Where’s it Going?

While the administration has stuck to its guns — even buying another 80 bitcoins when the price dropped to $19,000. The country has spent an estimated $106 million on bitcoins, which are now worth less than half of that.

Even ignoring the fallout from the bitcoin policy — the IMF has refused to move ahead with a loan that would cover El Salvador’s $800 million loan payment due at the beginning of next year and causing Moody’s and Fitch’s have downgraded the country’s debt several times — the experiment is a failure on a more basic level, an economist told El Diario de Hoy, a local newspaper.

“Bitcoin does not exist in the national economy, only in the head of government,” Cesar Villalona told the paper. “There are no prices in Bitcoin, no salaries in Bitcoin … no savings or anything like that. That is of no importance.”

What is important, he said, is the money the government spent building the bitcoin infrastructure and giving every citizen who created a Chivo digital wallet $30 worth.

The vast majority of people who spent that incentive never used the Chivo wallet again, and less than 2% of all remittances sent home to El Salvador by overseas workers used the digital wallet — despite the ability to bypass the normal fees of sending money from abroad. That was supposed to be a prime use case for bitcoin.

Still, the administration believes that cryptocurrency will play a part in El Salvador’s future, Finance Minister Alejandro Zelaya told the FT.

“We aren’t going to have results overnight,” he said. “We can’t go to bed poor and wake up millionaires. New technologies have shown how people in previous years were afraid of things like websites and digital business, but it’s been shown through time that reality imposes itself.”