Fitch: Buying bonds won’t reduce El Salvador’s risk

El Salvador has bought back more than $500 million of its bonds at a huge discount, but that may not lower its risk of default in early 2023.

While the country’s experiment with bitcoin as legal tender has been largely a failure, with almost no one using cryptocurrency as currency, its biggest impact by far has been on debt ratings. dismal of the country.

El Salvador was negotiating an International Monetary Fund (IMF) loan that would have enabled it to repay an $800 million Eurobond maturing in early 2023 when it made bitcoin legal tender alongside the dollar. American. This prompted the IMF to break off talks and led bond rating agencies to repeatedly cut the country’s debt rating.

The most recent was Fitch, which downgraded El Salvador from CCC to CC – leaving it even lower than the CCC+ level at which the rating agency does not even provide an outlook statement on its likelihood of default. That amounts to calling it a likely default, Reuters said.

Another major rating agency, S&P Global Ratings, has left El Salvador’s debt at CCC+, Rueters added, noting that it views “the debt buyback as opportunistic and akin to a liability management operation.” .

He added, “We believe the government would have been able to fulfill its short-term financial commitments in the absence of this transaction.”

On September 21, Salvadoran President Nayib Bukele tweeted that the country had finalized the advance purchase of $565 million in bonds maturing in 2023 and 2025, and had “generated more than $275 million in savings for our country”, in the process.

Another takeover offer will be made in about eight weeks, he said, pointing out that it was a “MARKET PRICE” and saying: “El Salvador is paying its debts!”

However, the size of the discount reflects the difficulty of the bonds.

No help

The announcement did not impress Fitch, however, which said in its September 15 downgrade announcement that the voluntary cash redemption was “below par” and “will likely further weaken its already stretched liquidity position… The size and scope of the transaction does not materially change the probability of default in Fitch’s view.”

In an article about the demotion and takeover, local news outlet La Prensa Grafica said Fitch’s “CC” rating meant “they expect El Salvador to default.”

He quoted economist Tatiana Marroquín, who said it will be very difficult to borrow money at this level, because “in light of public finances, it is very unlikely that we will pay”.

Without this ability, the government’s choices will be to either raise taxes or cut services, she said.

Without own currency, the government cannot adopt the potentially hyperinflationary tactic of printing money.

Critics grow, popularity doesn’t fall

Meanwhile, local news outlet noted that a recent Barron’s article said of the country’s Bitcoin experiment, “It’s either the biggest failure or the biggest scam.”

Instead of being “a crypto enthusiast’s dream,” Barron noted, “it turned into a cautionary tale of what happens when a country adopts a cryptocurrency, tries to integrate it to its economy and rebrands itself as a tech-friendly haven: It doesn’t work as advertised.

Another La Prensa Grafica article quoted financial services firm EMFI Group as saying in a recent report that “the government, as usual, tried to hide the negative result.”

It should be noted that despite the growing potential for default and the economic hardship it could impose, Bukele remains hugely popular after a massive anti-gang campaign.

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