Fitch Ratings downgraded El Salvador’s long-term currency issuer default rating (IDR) to ‘CCC’ from ‘B-‘ overnight, noting a funding shortfall for maturing debt maturities in the second half of 2022.
- Fitch’s “CCC” rating, seven notches above the restricted default, is defined like “Very low safety margin. Failure is a real possibility. Standard & Poor’s currently has a “B-” rating on El Salvador’s sovereign debt and Moody’s rating El Salvador at “Caa1”.
- In the credit rating agency’s view, the Central American country’s ability to access an International Monetary Fund (IMF) loan needed to repay nearly $1.3 billion (£960 million ) of debt due from August to October is uncertain, in part, due to the adoption of Bitcoin as legal tender, which the IMF opposes.
Overall funding needs will increase to $5.4 billion by 2023, including an $800 million Eurobond due in January 2023, creating a funding gap of nearly $2.5 billion, said added Fitch.
“The government has been in protracted talks with the IMF for almost a year for a possible three-year program of $1.3 billion; however, there are significant differences between the two sides in many key areas, according to Fitch. A deal would help cover the government’s funding gap and likely unlock further multilateral lending.
“The adoption of a cryptocurrency as legal tender, however, carries significant risks to financial and market integrity, financial stability, and consumer protection. It can also create contingent liabilities” ~ The Council of Management Concludes 2021 Article IV Consultation with El Salvador
In order to access IMF funding, El Salvador must improve reporting and audit governance, implement anti-money laundering laws, and remove Bitcoin as legal tender while improving oversight of its virtual currency system. , the IMF said in its recent Article IV consultation with El Salvador.
“The adoption of a cryptocurrency as legal tender, however, carries great risks to financial and market integrity, financial stability, and consumer protection,” said the IMF report noted. “It can also create contingent liabilities.”
El Salvador’s access to liquidity is limited, Fitch notes, as it has issued nearly $3 billion in Letes and Cetes and is prevented from issuing more due to legal constraints, as well as “the funds of Local private pensions and banks have a limited appetite to increase their exposure to such instruments.
External financing options are also limited due to prohibitive borrowing costs in international bond markets, exceeding 15%. El Salvador’s recent debt offerings have not been fully subscribed.
Bitcoin bond offer
El Salvador previously announced plans to offer a $1 billion 10-year bond backed by Bitcoin, which would pay a coupon of 6.50% plus a dividend of 50% of any gains in the cryptocurrency, as noted previously. Coupon payments would be made in US dollars or Tether stablecoin.
The country’s president, Nayib Bukele, recently outlined the proceeds of the potential Bitcoin-backed bond, half of which would buy Bitcoin and the other half would fund the development of a tax-free Bitcoin city in El Salvador that would be powered by a volcano.
The Bitcoin bond offering is tentatively scheduled for next month, Finance Minister Alahandro Zeleya told a local TV show.Frente to Frente‘.
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