Thursday, December 7

El Salvador’s Bitcoin Operations Increase the Risk of Its Sovereign Debt, Moody’s Warns

Credit rating agency Moody’s warned on Tuesday that El Salvador’s Bitcoin operations are “adding risk to an already weak sovereign credit outlook.” According to the rating agency, which in July had already released a negative forecast on its sovereign debt, the risk due to the growing Salvadoran acquisitions of cryptocurrency increases the possibility of a default on its payments. The president of the Central American country, Nayib Bukele, has dismissed the opinion, and has responded through social networks that his country “is not interested.”

Bitcoin became the currency of El Salvador on September 7, 2021 and since then its value has fallen by around 7%. Although there is no detailed information on the acquisitions, it is estimated that the Caribbean country currently has an estimated 1,391 Bitcoins (valued at about 51.28 million euros at today’s exchange rate).

Moody’s states that while this amount is not yet large enough to pose a significant threat to the government’s ability to meet its obligations, the risk will increase if the government buys more of the cryptocurrency. Likewise, the Minister of Finance, Alejandro Zelaya, assured last week that the adoption of Bitcoin by the nation has attracted foreign investment to the Central American nation.

Moody’s had already downgraded El Salvador’s debt rating in July to the “Caa1” category, reflecting “very high credit risk”. At the time, the agency cited a “deterioration in the quality of policymaking” in its decision. Slower growth in remittance flows and economic activity this year will weigh on government revenue, though a potential pension reform and proposed blockchain bond issue could provide some breathing room.

El Salvador has an $800 million bond due in January 2023, trading at 78.8 cents on the dollar, giving it a yield of more than 35%. yesegún Moody’s, lHigh yields have cut off the government’s access to foreign bond markets, which added to the lack of an agreement with the International Monetary Fund increases the risk of default.