El Salvador’s dollar-denominated bonds fell to an all-time low as the Central American nation’s debt began trading in “troubled territory” this week.
El Salvador’s US dollar bonds dropped to $0.644 on Monday, November 22, following news over the weekend that the Central American country would use Bitcoin bonds (BTC) to fund its Bitcoin City initiative. Dollar bonds have fallen steadily since April 2021, when they reached $1.10, according to data from Bloomberg.
A dollar-denominated bond is a bond issued outside the United States by a foreign company or government, denominated in US dollars instead of local currencies.
Monday’s slump resulted in the country’s debt becoming one of the worst performers in global trade, Bloomberg reported. Investors are concerned that President Nayib Bukele has blocked the International Monetary Fund (IMF) from helping the nation with development funds.
Nathalie Marshik, managing director of investment bank Stifel Nicolaus, commented that “this announcement cements the path of ‘everything but the IMF'” before adding that bonds are falling “as the market re-evaluates a possible lower recovery value to the unpredictability of policies.”
The Bitcoin bond will pay 6.5% annual interest, in addition to 50% of El Salvador’s Bitcoin earnings, once its initial investment costs for its mining infrastructure have been recouped. Dividends will be paid in USD or Tether (USDT), according to Samson Mow, director of strategy at Blockstream.
Mow believes the Bitcoin bond will be an alternative way for institutional investors to gain exposure to Bitcoin without having to maintain Bitcoin themselves. It will also be a way for investors to help El Salvador develop faster. Mow, who has been working with the El Salvador government on developing the Bitcoin title, told Bloomberg TV on Tuesday:
“We’re trying to structure this so that people can present [o título Bitcoin] to boards and directors as a normal title, because it is a normal title. Turns out there’s a huge chunk of Bitcoin pegged.”
In response to Mow’s Bloomberg interview, podcaster and popular Bitcoin advocate Anthony Pompliano predicted they will have “excessively absurd signatures”.
FORECAST: El Salvador bitcoin title will be ridiculously oversigned pic.twitter.com/2Kj0urm0SN
– Pomp (@APompliano) November 23, 2021
El Salvador has been in talks with the IMF for much of 2021 over a possible $1.3 billion loan. These conversations may be fading into obscurity, as President Bukele has decided to fund more local initiatives, like building schools with Bitcoin rather than focusing on the US dollar.
The IMF issued a declaration conclusion on El Salvador’s funding application on Monday. While El Salvador’s economy has quickly recovered from the pandemic, fiscal deficits and high public debt servicing are creating larger gaps in the services the country can provide, the fund said.
The report added that efforts to improve financial inclusion and increase growth are welcome, “but the risks posed by Bitcoin as a legal currency, the new payments ecosystem and the Bitcoin commerce must be addressed.”
“Because of these risks, Bitcoin should not be used as legal tender. The team recommends narrowing the scope of the Bitcoin law and encouraging stronger regulation and oversight of the new payment ecosystem.”
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