El Salvador’s dollar debt dives into Bitcoin bond plans

El Salvador’s dollar-denominated bonds have fallen to their lowest ever since the Central American nation’s debt began trading in “distressed territory” this week.

El Salvador’s USD bonds fell to 64.4 cents to the dollar on Monday, November 22, following the weekend’s news that the Central American country would use Bitcoin (BTC) bonds to finance its Bitcoin City initiative. Dollar bonds have fallen steadily since April 2021 when they peaked at $ 1.10 according to Bloomberg data.

A bond denominated in dollars is a bond issued outside the United States by a foreign company or government, which is denominated in USD instead of their local currency.

Monday̵[ads1]7;s fall resulted in the country’s debt becoming among the worst in global trade, Bloomberg reported. Investors are worried that President Nayib Bukele has shut down the IMF from assisting the nation with development funds.

Nifalie Marshik, CEO of investment banking firm Stifel Nicolaus, commented that “this announcement cements the ‘everything-except-IMF’ path”, before adding that bonds are falling “as the market reassesses possible recoverable value lower on the unpredictability of policy.”

The Bitcoin bond will pay 6.5% annual interest in addition to 50% of El Salvador’s Bitcoin gains once the original investment costs for the mining infrastructure have been recovered. Dividends will be paid in USD or Tether (USDT), according to Samson Mow, Blockstream’s Chief Strategy Officer.

Mow believes that the Bitcoin bond will be an alternative way for institutional investors to gain exposure to Bitcoin without having to hold Bitcoin themselves. It will also be a way for investors to help El Salvador develop faster. Mow, who has worked with the El Salvador government to develop the Bitcoin bond, said Bloomberg TV on November 23,

“We try to structure this in a way that people can present [the Bitcoin bond] to boards and board members as a normal bond because it is a normal bond. It just so happens that a large part of Bitcoin has been tied up. “

In response to Mow’s interview with Bloomberg, Podcaster and popular Bitcoin lawyer Anthony Pompliano predicted that they would be “ridiculously oversubscribed.”

El Salvador has been in talks with the International Monetary Fund (IMF) for much of 2021 about a possible $ 1.3 billion loan. These talks may disappear in the face of confusion as President Bukele has decided to fund several local initiatives, such as school construction, with Bitcoin over USD.

Related: El Salvador will build 20 ‘Bitcoin schools’ with profits from the Bitcoin Trust

The IMF issued a final statement regarding El Salvador’s funding request on 22 November. Although El Salvador’s economy has recovered quickly after the pandemic, financial deficits and high public debt services create larger gaps in the services the country can offer, it says.

The report added that efforts to improve financial inclusion and increase growth are welcome, “but risks arising from Bitcoin as a legal tender, the new payment ecosystem and trading in Bitcoin should be addressed.”

“Because of these risks, Bitcoin should not be used as a legal tender. Staff recommend limiting the scope of the Bitcoin Act and calling for stronger regulation and supervision of the new payment ecosystem.”