As El Salvador’s foray into bitcoin develops, the country’s keenly awaited and contentious “volcano bond” might be issued as early as Tuesday. Finance Minister Alejandro Zelaya told a local TV station that “between March 15 and 20 is a perfect time,” adding that the country has “nearly finished the tools.”
“However, the international context will inform us… “I didn’t expect the war in Ukraine,” Zelaya is reported stated. According to Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial, the bitcoin bond, dubbed the “volcano bond” after the mining operation’s power source, the Colchagua volcano, has become increasingly essential because of the country’s narrow credit possibilities and mounting debt.
According to Marshik, no specifics, regulatory framework, or prospectus have been provided regarding the bonds, making it difficult to forecast demand for the offering. “These bonds started as a sovereign bond,” Marshik said. “Now, it is a securitized corporate bond, which [raises] the question of success.”
A loan from the International Monetary Fund (IMF), which has urged El Salvador to remove bitcoin’s legal tender status, is unlikely. “The chances of an IMF loan are minimal,” she stated. “[El Salvador authorities] are going around stating they are working on pension reform and will receive a $590 million bond from the pension system.”
Bitcoin poses substantial dangers to financial stability and consumer protection, according to IMF executive directors in a statement on El Salvador’s financial health issued in January. “[Directors] emphasized that there are significant dangers involved with the use of bitcoin,” according to the statement. “They encouraged officials to limit the reach of the bitcoin law by revoking bitcoin’s legal cash status.”
El Salvador’s fiscal deficit is expected to reach 5.75% of GDP in 2021 and around 5% of GDP in 2022, according to the IMF. In 2026, public debt is expected to reach approximately 96% of GDP. The IMF believes El Salvador is on an “unsustainable path” given the conditions. “The IMF forecasts a primary balance for 2022, yet says the debt is unsustainable under current policies,” Marshik said. “El Salvador needs a 3% of GDP adjustment to get the debt to a sustainable level.”
According to IMF research, persistent budget deficits and expensive debt servicing are causing considerable and growing financial needs. El Salvador holds an $800 million bond that will mature in January 2023. Moody’s cut the country’s debt rating to CAA1 in July 2021, placing it at risk of default.
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