El Salvador dollar debt plunges on Bitcoin bond plans

El Salvador’s dollar-denominated bonds fell to all-time low as the Central American nation’s debt began trading in “distressed territory” this week.

El Salvador’s U.S. dollar bonds fell to $ 0.644 on Monday, November 22, following the weekend’s announcement that the Central American country would use Bitcoin Bonds (BTC) to fund its Bitcoin City initiative. Dollar bonds have fallen steadily since April 2021, when they exceeded $ 1.10 according to Bloomberg The data.

A dollar-denominated bond is a bond issued outside the United States by a foreign company or government and denominated in USD instead of local currencies.

Monday’s drop caused the country’s debt to become one of the worst in world trade, Bloomberg reported. Investors fear that President Nayib Bukele has blocked the International Monetary Fund (IMF) from helping the country with development funds.

Nathalie Marshik, managing director of investment bank Stifel Nicolaus, commented that “this announcement cements the ‘everything but the IMF’ path” before adding that bonds fall “as the market reassesses a possible salvage value more low due to unpredictability of policies. “

The Bitcoin Bond will pay 6.5% annual interest in addition to 50% of El Salvador’s Bitcoin earnings once its initial investment costs for its mining infrastructure have been recouped. Dividends will be paid in USD or Tether (USDT), according to Samson Mow, Blockstream’s chief strategy officer.

Mow believes the Bitcoin bond will be an alternative way for institutional investors to gain exposure to Bitcoin without having to own Bitcoin themselves. It will also be a way for investors to help El Salvador develop faster. Mow, who worked with the Salvadoran government on the development of the Bitcoin bond, said Bloomberg Television Tuesday:

“We try to structure this so that people can present [the Bitcoin bond] to boards of directors and directors as a normal link because it is a normal link. It turns out that a big chunk of Bitcoin is linked.

In response to Mow’s interview with Bloomberg, popular Bitcoin podcaster and advocate Anthony Pompliano predicted they would be “ridiculously oversubscribed.”

El Salvador has been in talks with the IMF for much of 2021 over a possible loan of $ 1.3 billion. These talks could sink into obscurity as President Bukele decided to fund more local initiatives such as building schools with Bitcoin on USD.

Related: El Salvador to Build 20 ‘Bitcoin Schools’ with Bitcoin Trust Surpluses

The IMF released a conclusion declaration regarding El Salvador’s funding request on Monday. Although El Salvador’s economy recovered quickly from the pandemic, budget deficits and high public debt services create larger gaps in the services the country can provide, he said.

The report added that efforts to improve financial inclusion and increase growth are welcome, “but the risks stemming from Bitcoin as legal tender, the new payments ecosystem and Bitcoin trading must be taken into account. account”.

“Because of these risks, Bitcoin should not be used as legal tender. Staff recommend narrowing the scope of the Bitcoin law and urging stronger regulation and oversight of the new payments ecosystem. “

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