El Salvador’s Debt Rising Despite Bitcoin Bonds Amid Backlash From IMF
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El Salvador’s Debt Rising Despite Bitcoin Bonds Amid Backlash From IMF

El Salvador's debt has been rising year on year since 2016 — can Bitcoin bonds spark a change in fortune?
Neither the author, Kingsley Alo, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

An announcement from the Salvadoran government to issue Bitcoin bonds worth $1 billion has sent the country’s debt levels to new highs. Investors are anxious about the country’s position with the International Monetary Fund (IMF) following this move. This development saw their dollar-backed bond market with a 13.5% interest rate plunge to 63.4 cents to the dollar. The figures recorded from the region have been among the worst-performing treasury obligation this week. 

El Salvador Turns To Bitcoin Amidst Rising Debt

The proposed Bitcoin bond is expected to last for 10 years with a 6.5% annual yield and a 50% dividend for price gains. This puts the volcano bond at par with some of the countries with the highest interest rates in the world

Some crypto advocates have started expressing their optimism about the success of the El Salvador Bitcoin project. Bitcoin investor and social media influencer Anthony Pomliano showed his sentiment in a Twitter post. It may be fair to state that his position might reflect that of many other crypto enthusiasts.

Consequently, the decision to increase El Salvador’s Bitcoin adoption rates has heightened the country’s unpleasant relationship with the IMF. President Bukele’s decision to approve Bitcoin as legal tender has faced ceaseless backlash and criticism from many stakeholders.

After failing to secure funding of $1.3 billion from the IMF, El Salvador has taken to unconventional means in a bid to salvage its plunging economy. In a recent report, the monetary body has openly criticized Bukele’s use of Bitcoin, citing high price volatility and contingent liabilities.

In response to the IMF’s statement, Bukele agreed with their assessment in tackling the Covid pandemic. However, he refuted the part of the report stating that El Salvador has “rapidly recovered” after the economic setback. This indicates that the actions from the central American country might be born out of hopes that Bitcoin will be able to give the El Salvadorian economy a boost.

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Bukele Aims Hopes Whales Will Buy Up Tokenized Bonds

El Salvador’s debt levels have worsened over the last few years. Data from Statistica, a research and data aggregation platform, reveals a rise of the country’s debt every year since 2016. The report showed that national debt rose to $21.71 billion last year, representing a 13% leap from its 2019 record. Projections were also made up until 2026, which stood at $35.65 billion based on the country’s current trajectory.

El Salvador’s National Debt Levels. Source: Statistica

Analysis from Colin Wu’s newsletter pointed out that if investors believed in the potential gains that could be made from the bonds, “why not just buy Bitcoin?” The validity of this opinion rests on the premise that more gains could be made from just buying the digital assets by a significant margin. Despite this, El Salvador seems to leverage the possibility of risk-averse investors exploring the crypto space in exchange for a government-issued bond.

Wu stated that El Salvador appears to be going for large investors on established crypto exchange platforms, as mentioned by Bukele.

“You know, there are a lot of whales on Bitfinex, so I don’t think it’s a problem to fill a $1 billion bond,” Bukele’s said.

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Do you see the Bitcoin bonds coming to El Salvador’s piling debt within the stipulated bond tenure? Let us know in the comments below.

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