El Salvador’s Bonds Saved from the Brink of Abyss Thanks to Bitcoin

• Since Fitch downgraded El Salvador’s credit rating in September 2022 with a default estimate in January 2023, the country’s “junk” rated bonds have rapidly risen.
• In January, the country repaid an $800 million bond that Moody’s had predicted it would not be able to repay.
• El Salvador announced Bitcoin as a legal tender in 2021 and started accumulating the cryptocurrency since September 2021.

Rating agencies believed that El Salvador would default on its debt and that its bonds were junk, but they forgot one thing; Bitcoin!

El Salvador is Being Saved Thanks to Bitcoin

Since Fitch downgraded El Salvador’s credit rating in September 2022 with a default estimate in January 2023, the country’s “junk” rated bonds have rapidly risen and followed the rise of Bitcoin throughout 2023. According to market data, the value of El Salvador’s bonds has increased by 62% and is currently trading at 72 cents per dollar. During the same period, Bitcoin has risen by 79%.

El Salvador’s bonds have surpassed the Invesco Emerging Markets Sovereign Debt ETF (PCY) index, which is one of the largest holders of the country’s debt, according to Factset. In January, the country repaid an $800 million bond that Moody’s had predicted it would not be able to repay.

El Salvador announced Bitcoin as a legal tender in 2021 and started accumulating the cryptocurrency since September 2021. According to Bloomberg’s calculations, the country had acquired 2,546 Bitcoins in April, which were purchased for $108.2 million and are currently valued at $76.6 million based on current market data.

In addition, Volcano Energy has announced a $1 billion commitment to build a 241 megawatt (MW) Bitcoin mine in the Metapán region of El Salvador. Among the investors is Tether, the issuer of USDT.

Rating agencies are not pleased with El Salvador’s moves

El Salvador’s decision to diversify into Bitcoin has consistently drawn reactions from rating agencies and the International Monetary Fund (IMF). Moody’s wrote last fall, “Policy differences associated with the government’s embrace of Bitcoin have reduced the likelihood of a timely IMF agreement to address the $800 million bond maturity due in January 2023.”

S&P wrote in 2021 that El Salvador’s decision to adopt Bitcoin as a legal tender would have “immediate negative implications.” S&P stated, “The risks of El Salvador’s adoption of Bitcoin appear to outweigh potential benefits” and added, “There are immediate negative consequences from a credit perspective.”

In February, the IMF stated that “risks have not materialized so far due to limited Bitcoin usage” regarding El Salvador’s interest in Bitcoin. The IMF additionally stated:

“Given the legal risks, financial fragility, and largely speculative nature, officials should reconsider plans to increase the government’s exposure to Bitcoin.”