The adoption of Bitcoin (BTC) in El Salvador has resulted in international risk rating agencies keeping a close check on the president of the Central American country, Nayib Bukele, and his dealings with cryptocurrency.
Apparently, El Salvador’s Bitcoin purchasing frenzy, if it continues, might exacerbate the country’s financial risk, according to ratings firm Moody’s. Notably, President Nayib Bukele’s administration has had liquidity challenges in the past, making Bitcoin trading “quite risky,” as per Moody’s analyst Jaime Reusche, who spoke to Bloomberg.
Per estimates, El Salvador now has around 1,391 Bitcoin in its possession; but, “if it gets much higher, then that represents an even greater risk to repayment capacity and the fiscal profile of the issuer,” Reusche stated.
El Salvador $800 million bond
According to Bloomberg, El Salvador owns a bond worth $800 million that will mature in January 2023. Furthermore, Moody’s downgraded the government’s credit rating to CAA1 in July of last year, indicating that the country has a very high chance of defaulting on its obligations.
As part of its justification for the downgrading, the rating agency noted a “challenging redemption schedule” as well as “a deterioration in the quality of policymaking.”
Last year, the nation declared Bitcoin to be legal tender, and in November, it announced that it would issue a $1 billion, 10-year Bitcoin bond via the company Blockstream. The crypto bonds might assist the nation in paying off its debt Moodys revealed:
“Unless Bitcoin bonds are very well received and oversubscribed, we are seeing that the probability of the need to restructure their traditional market bonds is increasing.”
The Central American nation is aiming to raise $1 billion through these bonds that will be available in February and March of this year. The money will be used both to build the Bitcoin City and acquire more Bitcoin.
IMF warns about Bitcoin
In November, the International Monetary Fund (IMF) warned El Salvador against using Bitcoin as a legal tender stating that the move carries risks to the financial system.
The IMF acknowledged that Bitcoin and cryptocurrencies could facilitate efficient payments, but acknowledged that declaring them legal tender will potentially erode financial stability.
“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities,” the IMF said.
Similarly, Professor of Applied Economics at Johns Hopkins University Steve Hanke, who recently got into a spat with President Bukele believes that the legalization in El Salvador will result in an economic catastrophe.