PEOPLEREGULATION

Fitch downgrades El Salvador's IDR to "CCC" junk status; Bitcoin bonds to be issued next month with a target of raising $1 billion

share
Fitch downgrades El Salvador

Ratings agency Fitch downgraded El Salvador's IDR long-term foreign currency issuer default rating from B- to CCC in a report released on the 9th. Additionally, President Nayib Bukele of El Salvador announced in November a Bitcoin bond issuance scheduled between 3/15 and 3/20.

Downgraded to CCC Grade by Fitch

According to a report by Fitch, El Salvador's recent downgrade to CCC was primarily due to several reasons:

  1. Increased dependence on short-term debt
  2. Limited additional local market financing space
  3. Uncertainty in obtaining additional multilateral assistance
  4. High borrowing costs from external market financing

El Salvador faces nearly $1.2 billion in external debt repayments in 2023, with $800 million due in January. According to the Bloomberg Emerging Market USD Sovereign Bond Index, the country's bonds were the worst-performing in emerging markets in 2021. The financing gap has increased from $1.2 billion in 2022 to $2.5 billion. The adoption of highly speculative and volatile Bitcoin as the national legal tender, among other reasons, has contributed to El Salvador's deteriorating financial situation.

"Institutional weakening and increased concentration of presidential power have heightened policy unpredictability, while the adoption of Bitcoin as legal tender has increased uncertainty regarding whether the International Monetary Fund (IMF) will open financing for 2022-2023," the Fitch report stated.

Following Moody's downgrade of El Salvador's sovereign debt last year for similar reasons, Fitch also lowered El Salvador's credit rating for similar reasons. The CCC rating is considered junk status, with a very high risk of default. In this scenario, El Salvador's access to external financing will become even more challenging, with only the possibility of obtaining slight assistance by offering higher interest rates. However, given El Salvador's current financial condition, facing bankruptcy may be inevitable if the country has to bear higher borrowing costs. The idea of turning around the country's fortunes through Bitcoin now seems like a shattered dream.

Bitcoin Bonds to Be Issued Next Month

El Salvador's Minister of Finance, Alejandro Zelaya, announced on the news program "Frente a Frente" on the 9th that the Bitcoin bonds announced by Nayib Bukele in November will be issued between 3/15 and 3/20. These bonds will be issued on the Liquid sidechain established by Bitcoin infrastructure developer Blockstream, with a coupon rate of 6.5%, a 10-year term, and maturity in 2032.

According to Nayib Bukele's initial statement, half of the raised $1 billion will be used to help build energy and Bitcoin mining infrastructure, while the remainder will be used to continue purchasing Bitcoin.

Given El Salvador's current situation, the success of this bond issuance is crucial. However, with major credit rating agencies downgrading its ratings, the smooth progress remains to be seen.