Bitcoin Country El Salvador: Is President Nayib Bukele At Risk Of Default?

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El Salvador became the first country in the world to recognize Bitcoin (BTC) as legal tender in almost a year. But President Nayib Bukele’s move does not help him get out of the debt trap.

With the classification of Bitcoin (BTC) as legal tender in June 2021, El Salvador under President Nayib Bukele set an example: The pioneering act was intended to attract investments from the crypto industry and reduce dependence on the US dollar. But at the moment this plan is not working. El Salvador’s government bonds trade internationally at a significant discount, which means there is a risk of default. The state’s plan to set up a Bitcoin fund has been shelved multiple times and appears to have been put on hold. The state of El Salvador on BTC purchases is in the red due to the recent price drop and therefore cannot generate new reserves. Several factors are important for forecasting the future.

The next big payday for El Salvador is late January 2023, when $800 million worth of government bonds will have to be paid off. In March this year, Finance Minister Alejandro Zelaya promised a default risk of “zero percent”, which seems realistic given the central bank’s reserves of around USD 3.4 billion. President Nayib Bukele wants to be re-elected in June 2024 and should therefore also work towards postponing financial problems to later if possible.

Bukele wants re-election – but the national debt remains

Another $800 million in government bonds will mature in 2025, and experts see the situation here as more complicated. Because in El Salvador, the US dollar remains the dominant currency. According to a study, Bitcoin has not yet established itself as a real alternative in business or everyday life. However, El Salvador has to borrow US dollars on the international financial markets and is already paying an interest premium of around 5 percent. Any sign of a worsening imbalance in public finances would make it very difficult for the government to continue to be seen internationally as a credible debtor.

Will the IMF take steps to save El Salvador from bankruptcy?

One way to do this could be to ask the International Monetary Fund (IMF) for money. But President Nayib Bukele has publicly fallen out with the IMF, and a potential IMF line of credit for El Salvador would come with strings attached. This should include downplaying Bitcoin’s importance to the Central American country, as well as domestic political reforms. But Bukele rules with an iron fist, critics accuse him of an “authoritarian style”. It is hard to imagine that Bukele, who is very popular with the public, would accept and implement the guidelines of the IMF.

It is sometimes heard that Bukele and El Salvador can count on the help of the crypto industry in a financial emergency. For example, major crypto exchanges might be willing to offer direct lending or bolster the financial system by depositing US dollars with local banks. Theoretical rationale for this: The crypto industry is interested in continuing the history of El Salvador as a “bitcoin country”. However, there has been no public comment on such approaches for the state budget, and the probability cannot be assessed as particularly high.

Conclusion: El Salvador – Bitcoin alone did not solve financial problems

El Salvador’s national debt has reached nearly 90 percent of annual GDP, a respectable number thanks in no small part to the loans arranged by Bukele. The good 100 million US dollars for which Bukele bought Bitcoin is a small good in this environment. Therefore, the message “Bitcoin crash has bankrupted El Salvador” is factually incorrect, the problems are broader. Low economic growth, additional costs due to the Corona crisis, uncertainty due to the Russian war of aggression against Ukraine – all of this plays a role in the state budget. Bukele still has financial leeway for his country to avoid interference from the IMF and other foreign donors. But his approach of making easy profits for El Salvadorans and citizens with the rising price curve of Bitcoin and BTC has failed for the moment.

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