El Salvador’s credit rating is not making a good impression and experts from the international rating agency Moody’s are already sounding the alarm. According to analyst Jaime Reusche, the country’s government support for bitcoin and the legalization of the first cryptocurrency as a means of payment have undermined the confidence of foreign investors in the stability of El Salvador’s economy. We talk about the situation in more detail.
Why Are Bitcoin Fans Criticized?
First of all, it should be noted that El Salvador has already managed to become an example for another state, the Kingdom of Tonga, which is located in Polynesia. As a former local member of parliament said, the country may soon recognize bitcoin as an official means of payment. In addition, his government was inspired by the Salvadoran legislative document, implementing its own bill.
Recall that the government of El Salvador has been officially buying bitcoins for several months. Reusche notes that such a strategy is “quite risky, especially for a state that has already suffered from a liquidity crisis”.
Bukele himself does not reveal the exact amount of bitcoins bought from the budget, but judging by his posts on Twitter, where he regularly reports new rounds of buying coins, El Salvador has at least 1391 BTC. According to Decrypt, the strategy of bitcoin accumulation so far brings losses to the country’s economy. The average cost of buying coins is $51,056 for 1 BTC, while currently bitcoin is trading around $43,000. That is, on paper the country’s losses from investing in cryptocurrency are estimated at around $12 million.
Losses are displayed ” on paper “, because that 12 million is an unrealized loss. In other words, if the price of bitcoin rises again, El Salvador could well be a winner. Unfortunately, the cost of cryptocurrency could also drop, which would put the government in a very difficult situation, especially when it comes to public opinion towards the authorities.
Government bonds: the risks
The total value of El Salvador government bonds reaches $800 million. The deadline for fulfilling the obligations on these securities is set for the month of January 2023. According to most investors, the risks are high, which means that a small part of citizens is sure that the Salvadoran government will be able to repay their debts on time.
The country’s bonds are not popular in the securities market, so it is difficult for El Salvador to attract foreign capital for investment. So far, the amount of bitcoins purchased is relatively small, considering the size of the state’s economy. But Reusche fears that if the Salvadoran president continues to replenish national cryptocurrency reserves, the situation could get even worse when it comes to risk compliance. The expert continues:
“If the crypto reserve becomes much larger, this poses an even greater risk to the creditworthiness and tax profile of the bond issuer. »
That is, in the future, Moody’s may again lower the country’s credit rating, which will certainly not be beneficial for the country. After the last cut in July, El Salvador’s credit rating fell to Caa. It is allocated to bonds “supposed to have a bad reputation and a very high credit risk”.
Moreover, in addition to ordinary bonds, El Salvador recently had the idea of issuing “crypto bonds”, securities backed by digital assets. The government plans to launch their issue during this year, designating an amount of up to $1 billion. But before that, the parliament will pass all the necessary bills to legalize such an instrument.
The proceeds from the crypto bonds are going to be used for the development of the crypto payment infrastructure in the country and the construction of so-called Bitcoin City, a new city designed for innovations in the field of cryptoassets.
It turns out that so far the economy of El Salvador is seriously dependent on the price of the first cryptocurrency. And the latter, as we know, can vary very suddenly in an unpredictable way. We believe that the game started by Bukele is very dangerous, especially on the scale of the country, where the fate and prosperity of citizens depend on his actions. Perhaps the country will still have time to become an obvious example for most states that will also join the peaceful revolution of digital assets.
Receive a digest of news in the world of cryptocurrencies by subscribing to our new service of newsletter daily and weekly so you don’t miss any of the essential Cointribune!
The blockchain offers so many possibilities! After NFTs and the metaverse, who knows what this technology can still offer us? This universe fascinates me and I love to read and write about it. I wish you as much pleasure while reading me!