The Salvadoran experiment convert bitcoin to legal tender could bankrupt the country. It happens that this Monday the price of the most popular cryptocurrency in the world plummeted more than 50 percent from its all-time highs and caused the fall of the bonds of the Government of El Salvadorwhich are trading at 40 percent of their original value, reflecting doubts on the part of investors that the country can meet the next payment on its debt.
Bitcoin (BTC) fell on Monday afternoon to $30,339 in New York (-11 percent), a minimum trading value for the most well-known cryptocurrency in the last year and a half, and accumulates a decline of 55 percent from its maximum in November.
Likewise, other major cryptocurrencies posted even deeper declines such as Ehter (-11 percent), Solana (-14 percent), and Avalanch (-18 percent), among others.
Since January 28, 2021, there were only seven days in which Bitcoin traded below $31,000: this Monday was one of them.
The global flight of riskier investments in the face of the rise in interest rates by the United States Federal Reserve (FED) is being particularly difficult for cryptocurrencies, which lost almost $750 billion in market capitalization in the last six weeks (-35 percent) and $1.6 trillion since November (-55 percent), when it had hit its $3 trillion cap record .
“We’re watching a slow-motion meltdownin part because it’s mainly been longs selling rather than leveraged liquidations,” Josh Lim, head of derivatives at brokerage Genesis Global Trading, told Bloomberg. Michael Novogratz, a cryptocurrency investor who leads Galaxy Digital Holdings, told Bloomberg. Ltd., warned that wait for things to get worse before they get betterr.
Before this panorama, The Savior -which, at the initiative of President Nayib Bukele, became the first country in September to establish bitcoin as current legal currency, on par with the US dollar- faces difficulties in your credit ratingwhich is used, to a great extent, for the market to define the risk of debt default.
A low rating translates into higher interest that the government has to pay to creditors. Also a rating considered “garbage”, as is the case of El Salvador, prevents the country from accessing global markets to issue more debta.
Added to this is the weakening of institutions and the concentration of power in the presidency, which have increased the policy unpredictability.
In summary, the fall of bitcoin this Monday implies for El Salvador greater financial risks derived from a greater dependence on short-term debt, a payment of 800 million dollars due in January 2023, a still high fiscal deficit, the uncertainty around additional multilateral financing and the increase in external financing costs.
According to specialists, debt is expected to reach 86.9 percent of gross domestic product (GDP) this year “which raises concerns about the sustainability of the debt in the medium term.”
By way of anticipation, on April 29, the Bukele administration announced its intention to reform the pension system, without going into details of how much it expects to collect in taxes to strengthen public finances.