Weeks Before Bitcoin Bond Launch, Fitch Slashes El Salvador’s Credit Rating

Weeks before El Salvador is planning to launch a $1 billion bond issue, Fitch Ratings slashed its credit default rating from an already dismal B- to CCC.

Along with a slew of specific financial worries — among them a worsening debt-to-GDP ratio, a still-high deficit, and an $800 million bond payment due next January — Fitch cited President Nayib Bukele’s embrace of bitcoin in explaining its decision.

“In Fitch’s view, weakening of institutions and concentration of power in the presidency have increased policy unpredictability,” Fitch said in a Feb. 9 statement. “The adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023.”

However, Fitch made clear that Bukele’s decision to make bitcoin a legal tender alongside the U.S. dollar is not the only, or even biggest, factor in its belief that an IMF loan is not in the cards.

For one thing, the ratings agency predicted that El Salvador’s economy will grow only 3.5% in 2022, down from 10.5% in 2021.

“The government has been in extended discussions with the IMF for nearly a year for a possible USD1.3 billion three-year program,” Fitch said. “However, there are important differences between the two sides in many key areas.”

There’s more than a little doubt that the Bukele administration will be able to sell the bitcoin-backed volcano bonds, which references that location of El Salvador’s planned Bitcoin City, located on a volcano to provide cheap power for bitcoin mining.

The volcano bonds offer 6.5% annually, less than half of the 13% El Salvador currently pays bond buyers, although they do come with a plan to pay an extra dividend by a staggered liquidation plan after six years.

One economist told CoinDesk that anyone “buying this bitcoin-backed bond is betting on the cryptocurrency in a very big way, ignoring the credit market currently signaling that El Salvador is very much facing a distressed-debt situation.”

Profit Claims Challenged

Salvadoran news outlet La Prensa Grafica challenged President Bukele’s assertion that the country has made enough profit on its bitcoin holdings to build a veterinary hospital.

On Jan. 21, President Bukele tweeted that El Salvador has bought 1,801 bitcoins.

But, “the numbers don’t add up,” according to economist Ricardo Castaneda of the Central American Institute of Fiscal Studies told the paper.

“To make a profit the bitcoins would have to have been sold,” according to Castaneda, pointing out that otherwise the country wouldn’t have been able to take profits on its investment. “If we check how much the government has spent, in reality the government would have losses.”

Which hasn’t stopped El Salvador for doubling down on its bitcoin bet, according to El Salvador.com.

On Feb. 8, Finance Minister Alejandro Zelaya announced plans to offer another $500 million in bitcoin bond by mid-March.

Wallets and ATMs

The much-troubled and much-maligned Chivo Wallet program is getting an upgrade, as problems like hacks and flat-out failures have led to a chorus of complaints about the quality of the digital wallet President Bukele used to hand out $30 in bitcoin to anyone who signed up for one when bitcoin became legal tender.

As a result, Chivo 2.0 is coming, El Salvador reported last week. The wallet will be created by AlphaPoint, which also intends to install 1,500 bitcoin ATMs throughout the country, El Salvador.com said.

The company said that its goal is to help El Salvador’s people, noting that the ATM network’s goal is to simplify payments for public services, taxes and many other daily transactions.