El Salvador’s foray into bitcoin continues to expand, and the country’s keenly watched and contentious “volcano bonds” might begin trading as early as Tuesday.
Finance Minister Alejandro Zelaya told a local television station that “between March 15 and 20 is the optimal date,” noting that the nation has “nearly completed the instruments.”
“However, the worldwide situation will inform us… “I was not anticipating a conflict in Ukraine,” Zelaya allegedly said.
The bitcoin bond — dubbed the “volcano bond” after the mining operation’s power source, the Conchagua volcano — has become increasingly critical in light of the country’s limited loan prospects and mounting debt, according to Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial.
Marshik said that no information, legal framework, or prospectus have been provided for the bonds, making it impossible to forecast demand for the offering.
“These debts originated as national debt,” Marshik said. “Now, it is a securitized corporate bond, which casts doubt on its viability.”
Marshik believes that a loan from the International Monetary Fund (IMF), which has encouraged El Salvador to abolish bitcoin as legal cash, is improbable.
“The chances of receiving an IMF loan are minimal,” she said. “[El Salvador authorities] are announcing that they are pursuing pension reform and will get a $590 million bond from the pension system.”
Bitcoin presents substantial dangers to financial stability and consumer protection, IMF executive directors said in a statement regarding El Salvador’s financial health in January.
“[Directors] emphasised the significant hazards involved with bitcoin usage,” the statement said. “They encouraged the government to limit the reach of the bitcoin legislation by de-legalizing bitcoin.”
El Salvador’s budget deficit, according to the IMF, is expected to reach 5.75 percent of gross domestic product (GDP) in 2021 and about 5% of GDP in 2022. Additionally, public debt is expected to increase to around 96 percent of GDP in 2026. El Salvador, the IMF says, is on a “unsustainable path” given the conditions.
“While the IMF projects a primary balance in 2022, it maintains that the debt is unsustainable under present policies,” Marshik said. “El Salvador need a 3% GDP adjustment to bring its debt to a manageable level.”
The IMF study observed that persistent fiscal deficits and high debt servicing costs are resulting in considerable and growing financial requirements.
El Salvador is due to repay a $800 million loan in January 2023. Moody’s cut the country’s debt rating to CAA1 in July 2021, placing it at danger of default.