Bitcoin bond plan sends El Salvador’s dollar debt diving


The Central American country’s debt was among the world’s worst performers on Monday as investors considered whether President Nayib Bukele’s plan to sell sovereign bitcoin bonds closes the door on a deal with the International Monetary Fund.

NEW YORK: Plans for a US$1bil (RM4.2bil) bitcoin bond in El Salvador sent the nation’s dollar-denominated bonds to an all-time low.

El Salvador’s dollar denominated notes due in 2050 fell 2.2 US cents to 64.4 US cents (92 sen to RM2.70) on the US dollar on Monday, the lowest ever.

The Central American country’s debt was among the world’s worst performers on Monday as investors considered whether President Nayib Bukele’s plan to sell sovereign bitcoin bonds closes the door on a deal with the International Monetary Fund.

Its progress with the IMF has soured since May, when Bukele’s party took over the assembly and fired five top judges and the attorney general. His policies, including the adoption of bitcoin as legal tender, have been repeatedly criticised by the multilateral lender.“This announcement cements the ‘anything-but-the-International Monetary Fund (IMF)’ path,” said Nathalie Marshik, a Stifel Nicolaus & Co managing director.

Bonds are falling “as the market reassesses possible recovery value lower on unpredictability of policies.”

The nation’s debt is trading in distressed territory, with investors now demanding 1,168 basis points in extra yield to hold El Salvador’s dollar bonds over US Treasuries, according to JPMorgan Chase & Co data.

While the plan to sell new, tokenised bonds could offer the government some breathing room, it also adds to uncertainties and potential risks.

For Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, the announcement of the bitcoin bond is a sign that the nation is doubling down on its own funding and growth.

“Innovative financing is not in itself a solution,” she wrote in a note Monday.

The nation’s next big payment to external creditors isn’t due until January 2023.

The US$1bil (RM4.2bil) in the tokenised bonds could give the government a respite, as talks with the IMF for a US$1.3bil (RM5.4bil) loan were downgraded to an annual Article IV review that concluded before the bond sale was announced Nov 20, according to the lender. “Given bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability,” the IMF’s statement on the 2021 Article IV Mission said. “Its use also gives rise to fiscal contingent liabilities.”

The proposed 10-year tokenised bitcoin bond is expected to pay 6.5% annually, with an added dividend of 50% of any bitcoin gains once El Salvador has recouped its original investment, according to Blockstream Corp chief strategy officer Samson Mow. — Bloomberg

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