Why the El Salvador government’s Bitcoin purchases will hurt the country’s economy: Moody’s expert response
El Salvador’s credit rating is not looking good, experts at international rating agency Moody’s are already sounding the alarm. According to analyst Jaime Roichet, government support for Bitcoin and the legalisation of the cryptocurrency as a means of payment itself have significantly undermined foreign investors’ confidence in El Salvador’s economic stability. We’ll go into more detail about the situation.
It should be noted that El Salvador has already set an example for another country, albeit a small one. This is the kingdom of Tonga in Polynesia. As a former member of the local parliament said the day before, the country may recognize Bitcoin as an official tender as early as 2022. Accordingly, once BTC is accepted, it can be paid for in any major locations.
The Salvadoran document was used as an example for the bill. Read more about it in a separate article.
What are Bitcoin fans criticised for?
Recall that the government of El Salvador has been officially buying bitcoins for months now. Roichet notes that such a strategy is “quite risky – and especially for a state that has suffered from a liquidity crisis before”.
Buechele himself doesn’t disclose the exact amount of BTC he’s budgeted, but judging by his tweets – yet he’s constantly reporting on new rounds of coin purchases on Twitter – El Salvador has at least 1,391 BTC. According to Decrypt, the bitcoin hoarding strategy has so far been taking a toll on the country’s economy. The average cost of buying coins is $51,056 per BTC, with Bitcoin trading around $43,010 this morning. In other words, the country’s “on paper” losses from investing in crypto are estimated at around $12 million.
El Salvador’s President Nayib Bukele
The losses are shown "on paper" because the 12 million is an unrealised loss. That is, if the price of Bitcoin rises again, El Salvador could well be in the black. Unfortunately, the value of the cryptocurrency could also fall lower, which would put the government in a very difficult position. And especially in terms of the electorate's attitude towards the authorities.
El Salvador’s government bond issue reaches $800 million. The deadline for the state’s obligations regarding these securities is January 2023. According to most investors, they are very risky, meaning that few are confident that the Salvadoran government will be able to pay its debts on time.
Bitcoin acceptance in El Salvador
The country’s bonds are not popular on the stock market, so El Salvador has a hard time attracting foreign capital for investment. So far, the amount of bitcoins acquired is relatively small, considering the size of the state’s economy. But Roichet fears that if President Buquelet continues to add to the nation’s cryptocurrency reserves, the situation will get even worse in terms of risk compliance. The expert continues.
If the crypto reserve becomes much larger, it poses an even greater risk to the solvency and fiscal profile of the bond issuer.
In other words, Moody's could downgrade the country's credit rating again in the future, which would definitely not be good for it. The agency last did so in July, when El Salvador's credit rating was downgraded to Caa. It is assigned to bonds that are 'presumed to have a poor reputation and are subject to very high credit risk'.
Notably, earlier protests erupted in the country against the adoption of Bitcoin
As a reminder, in addition to conventional bonds, El Salvador has relatively recently had the idea of issuing “cryptobonds” – securities backed by digital assets. The government plans to launch their issuance as early as 2022 in the amount of up to a billion dollars. Before that, the parliament will pass all the necessary bills to legalize such an instrument.
The revenues from cryptocurrencies want to be used to develop the country’s cryptopayment infrastructure and build the so-called Bitcoin City, a new community designed for innovation in digital assets.
So far, El Salvador's economy is heavily dependent on the Bitcoin price. The latter, as we know, can change very dramatically in an unpredictable manner. We think the game Buquela is playing is very dangerous - especially on a national scale, where the fortunes and livelihoods of citizens depend on his actions.
However, the chances of success here are also good, so El Salvador is left with nothing but good luck. Perhaps the country will still manage to become an obvious example for most of the big countries, which will also join the peaceful digital asset revolution.
We recommend that you follow the crypto market in our Millionaires’ Crypto Chat. There, we will talk about other topics related to the blockchain and decentralisation industry.
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