El Salvador's Dollar Debt Plunges on Bitcoin Bond Plan

El Salvador's dollar-denominated bonds fell to record lows as El Salvador's debt began trading in "distressed range" this week.

El Salvador’s dollar bonds fell to 64.4 cents to the dollar on Monday, Nov. 22, following news over the weekend that the Central American nation will use bitcoin bonds to fund its plans for a bitcoin city. The dollar bond has fallen steadily since breaking through $1.10 in April 2021, according to data compiled by Bloomberg.

Dollar-denominated bonds are bonds issued by a foreign company or government outside the United States that are denominated in U.S. dollars rather than their local currency.

Monday's losses made the country's debt one of the worst performers in global trading, according to Bloomberg. Investors are worried that El Salvador's President Nayib Bukele has refused to allow the International Monetary Fund to provide development finance assistance to the country.

Nathalie Marshik, managing director at investment banking firm Stifel Nicolaus, commented that "the statement cements the 'everything but the IMF' path," before adding that "markets are wary of a possible recovery as policy unpredictability Assessment lowered," bond prices are falling.

Once the initial investment cost of El Salvador’s mining infrastructure is restored, the Bitcoin Bond will pay 6.5% annual interest, along with 50% of El Salvador’s Bitcoin earnings. According to Blockstream chief strategy officer Samson Mow, dividends will be paid in U.S. dollars or Tether (USDT).

Mow believes that bitcoin bonds will be another way for institutional investors to gain exposure to bitcoin without owning it. It would also be a way for investors to help El Salvador grow faster. On Nov. 23, Mow, who has been working with the government of El Salvador on a bitcoin bond, told Bloomberg Television:

“We’re trying to structure it in such a way that people can present (the bitcoin bond) to the board as a normal bond because it’s a normal bond. It just happens to be tied to a chunk of bitcoin. "

In response to Mow’s interview with Bloomberg, podcaster and Bitcoin proponent Anthony Pompliano predicted that Bitcoin bonds would be “incredibly oversubscribed.”

El Salvador has spent most of 2021 negotiating a possible $1.3 billion loan with the IMF. Those talks could become murky now that President Bukele has decided to fund more local projects, such as school construction, in bitcoin rather than dollars.

On November 22, the IMF issued a concluding statement on El Salvador's funding request. The statement stated that although El Salvador's economy has recovered rapidly from the epidemic, fiscal deficits and high public debt services are causing greater holes in the services that the country can provide.

Efforts to improve financial inclusion and boost growth are welcome, the report added, "but risks arising from bitcoin as a fiat currency, new payments ecosystems and bitcoin exchanges should be addressed."

“Because of these risks, bitcoin should not be used as legal tender. Staff recommend narrowing the scope of bitcoin law and urge greater regulation and oversight of the new payment ecosystem.”

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