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El Salvador's dollar debt falls on Bitcoin bond plans

4 min reading

As El Salvador continues to embrace Bitcoin, investors have been tired of the country's dollar debts; while, the IMF has suggested that BTC not be used as legal tender.

El Salvador's dollar-denominated bonds have reached an all-time low, with the Central American nation's debt trading in "distressed territory" this week.

El Salvador's USD bonds dropped to 64.4 cents on the dollar on Monday, Nov. 22, after the Central American country announced over the weekend that it will use Bitcoin (BTC) bonds to support its Bitcoin City project. According to Bloomberg data, dollar bonds have been falling gradually since April 2021, when they surpassed $1.10.

A dollar-denominated bond is issued outside of the United States by a foreign firm or government that is denominated in USD rather than the local currency.

Following Monday's decline, the country's debt became one of the worst performers in global trading, according to Bloomberg. Investors are apprehensive that President Nayib Bukele has restricted the IMF from providing development assistance to the nation.

Nathalie Marshik, Managing Director of investment banking company Stifel Nicolaus, stated that “this announcement cements the ‘anything-but-the-IMF’ path,” before stating that bonds are dropping “as the market reassesses possible recovery value lower on the unpredictability of policies.”

The Bitcoin bond will pay 6.5 per cent annual interest and 50% of El Salvador's Bitcoin gains once the initial investment expenses for its mining infrastructure have been recovered. According to Samson Mow, Blockstream's Chief Strategy Officer, dividends will be paid in USD or Tether (USDT).

Mow thinks that the Bitcoin bond will provide an alternate avenue for institutional investors to acquire exposure to Bitcoin without actually holding it. It will also enable investors to assist El Salvador in developing more efficiently. Mow, who has been developing the Bitcoin bond with the El Salvador government, told Bloomberg TV on Nov. 23, “We’re trying to structure this in a way that people can present [the Bitcoin bond] to boards and directors as a normal bond because it is a normal bond. It just happens to have a large chunk of Bitcoin tied in.”

Podcaster and renowned Bitcoin advocate Anthony Pompliano forecasted that they would be "ridiculously oversubscribed" in response to Mow's interview with Bloomberg.

El Salvador has been in discussions with the International Monetary Fund (IMF) about a possible $1.3 billion loan for much of 2021. Those discussions may be receding into oblivion, since President Bukele has decided to fund more local efforts, such as school building, with Bitcoin instead of USD.

On November 22, the IMF published a final statement on El Salvador's funding request. While El Salvador's economy has quickly recovered from the pandemic, fiscal deficits and high public debt services are generating larger gaps in the services the country can deliver, according to the report.

The report went on to say that while efforts to enhance financial inclusion and growth are desirable, “but risks arising from Bitcoin as a legal tender, the new payments ecosystem, and trading in Bitcoin should be addressed.”

“Because of those risks, Bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the Bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem.”

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