Bukele’s Bitcoin trade raises El Salvador’s sovereign credit risk: Moody’s

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El Salvador’s his­toric embrace of Bit­coin (BTC) could have neg­a­tive con­se­quences on the country’s sov­er­eign cred­it out­look, accord­ing to Moody’s Investors Service. 

Moody’s ana­lyst Jaime Reusche told Bloomberg this week that El Salvador’s Bit­coin gam­bit “cer­tain­ly adds to the risk port­fo­lio” of a coun­try that has strug­gled with liq­uid­i­ty issues in the past. 

Under the lead­er­ship of Pres­i­dent Nay­ib Bukele, El Sal­vador has rec­og­nized Bit­coin as legal ten­der and issued a state-run cryp­to wal­let to facil­i­tate pay­ments, trans­fers and own­er­ship. Along the way, El Sal­vador has amassed a trea­sure chest of 1,391 BTC, with Pres­i­dent Bukele famous­ly “buy­ing the dip” on sev­er­al occa­sions by using Bitcoin’s volatil­i­ty to add to his country’s holdings. 

How­ev­er, Reusche warned that accu­mu­lat­ing more BTC would ele­vate El Salvador’s risk of default. “If it gets much high­er, then that rep­re­sents an even greater risk to repay­ment capac­i­ty and the fis­cal pro­file of the issuer,” he said.

In addi­tion to down­grad­ing El Salvador’s cred­it rat­ing, Moody’s has warned that the country’s so-called Bit­coin vol­cano bond could lim­it its access to for­eign bond mar­kets. Pro­ceeds of the vol­cano bond, which is expect­ed to raise rough­ly $1 bil­lion, will be used to fund El Sal­vador’s Bit­coin City project. 

Relat­ed: Ton­ga to copy El Salvador’s bill mak­ing Bit­coin legal ten­der, says for­mer MP

Attacks on El Salvador’s Bit­coin gam­bit by lega­cy finan­cial insti­tu­tions are noth­ing new. In Novem­ber 2021, the Wash­ing­ton-based Inter­na­tion­al Mon­e­tary Fund warned El Sal­vador against using Bit­coin as legal ten­der. Mean­while, the World Bank has reject­ed the country’s request for assis­tance in imple­ment­ing its Bit­coin Law over the cryp­tocur­ren­cy’s alleged envi­ron­men­tal and trans­paren­cy issues. 

Nev­er­the­less, El Sal­vador has remained stead­fast in embrac­ing Bit­coin and in cre­at­ing an attrac­tive envi­ron­ment for cryp­to investors and entre­pre­neurs. Last week, finance min­is­ter Ale­jan­dro Zelaya said the country’s Bit­coin Law has already attract­ed for­eign investment. 



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