For five months now, El Salvador President Nayib Bukele has been trying to hawk a bitcoin-backed bond to international investors. This, he’s insisted, is a better option than turning to multilateral lenders in Washington for more conventional financing.
It’s not working. Bukele, a devout believer in crypto currencies, has yet to receive a single penny of the $1bn (R15.8bn) he’s seeking, and this — along with stalled talks with the International Monetary Fund — is deepening concern among creditors that the country will fail to pay back an $800m (R12.7bn) bond at the start of next year.
Prices on the country’s debt collapsed in April, falling 15.1%, a rout only surpassed by bonds in war-torn Ukraine. El Salvador’s benchmark bonds due in 2032 now yield 24%, a level that suggests investors are bracing for default.
Since abandoning talks with the IMF and adopting bitcoin as official tender last year, investors have soured on El Salvador’s bonds, concerned not only with the ability to keep current on its debt but also the willingness to keep paying under the eccentric 40-year-old Bukele who has flashed authoritarian tendencies. And now, as the January debt maturity approaches, the 78-cent price on the notes shows many bondholders are losing conviction.
“If Bukele has given up on the possibility of bond market financing, why continue to service the debt?” said Jared Lou, a portfolio manager at William Blair Investment Mgmt in New York. “If he is re-elected in 2024, Bukele would have little incentive to pay bonded debt, nor offer a high recovery value on the existing debt. These challenges make it hard for El Salvador to find a floor.”
While plans to raise $1bn with a bitcoin-backed bond were unconventional at best, some investors were holding out hope that it could at least bring in some cash to government coffers. It’s not clear at this point whether the transaction will go through.
Neither the presidency’s office nor the finance ministry replied to requests for comment on the drop in bond prices. In recent comments, the finance minister and central bank president have said there’s “zero risk” of the country defaulting.
El Salvador was planning to issue so-called volcano bonds by March using blockchain technology and use half the proceeds to buy bitcoin. The sale, however, has languished and the government has yet to even present to congress a digital securities bill that’s required for its issuance.
While the proceeds wouldn’t go towards paying the January maturity necessarily, if successful, subsequent transactions could be a source of financing going forward.
It was part of a bigger plan to attract crypto enthusiasts and digital nomads to live in a community to be dubbed Bitcoin City that would be powered by geothermal plants installed at a nearby volcano.