Moody’s criticizes El Salvador’s Bitcoin purchases

The El Salvador government’s bitcoin operations are contributing to the weakening of the country’s already low credit rating and signaling a growing risk of default. Jaime Reusche, an analyst at Moody’s, said this in an interview with Bloomberg. 

According to him, the fact that the government holds part of the assets in the first cryptocurrency “definitely adds to the portfolio of risks.” He emphasized that operations with digital assets pose a threat, especially for the state, which “has experienced liquidity difficulties in the past.”

El Salvador’s bitcoin fund has 1,241 BTC on its balance sheet. Reusche stressed that the amount of government investment is not large enough to deprive him of the ability to fulfill its obligations. However, in his opinion, the likelihood of such a threat will increase if President Nayib Bukele does not change the course of monetary policy.

“If it [the volume of the fund] gets much higher, it will pose an even greater risk to the solvency and fiscal profile of the issuer,” Reusche said.

Moody’s also noted that high yields (more 35%) of bitcoin bonds issued in November last year closed the government’s access to foreign markets, and the lack of an agreement with the International Monetary Fund increases the risk of default in the country. 

In August 2021, Moody’s lowered the long-term credit rating of El Salvador in foreign currency to investment grade Caa1 with a “negative” outlook.

Recall that on September 7, 2021, a law recognizing bitcoin as an official means of payment along with the US dollar came into force in El Salvador.

In the same month, the government of the country purchased 700 BTC through a specially created fund. 

In October, the authorities increased the reserves in the first cryptocurrency by another 420 BTC, and the following month they purchased an additional 100 BTC.

In December El Salvador purchased 21 BTC. According to President Bukele, the country invested in bitcoin to celebrate “the last 21 days of the 21st year of the 21st century.”