Investors have reacted suspiciously to the latest policy decisions. In the stock market they are already talking about “the Bukele risk premium”.
The same day that the Bitcoin Law came into force, the same one that the government promises will attract a lot of investment for the country, El Salvador’s major debt creditors again showed their distrust in selling Salvadoran bonds at a higher price. low, a trend that has remained that way throughout the week.
From Tuesday to yesterday, the various bonds of El Salvador fell between 8% and 15%, reaching prices of $ 90, $ 87 and $ 75 for every $ 100 invested, which in turn means a higher interest payment to offset the risk you have today against your creditors.
But it was not the introduction of the Bitcoin Law that drove out investors, but rather the possibility of a presidential re-election of Nayib Bukele and an unpredictable fiscal situation due to the government not concluding an agreement with the International Monetary Fund. (IMF) to improve its finances.
In an article on El Salvador, the Financial Times reported that although Bukele announced the purchase of 150 bitcoins on the day the law was enacted, “bond traders were not impressed.”
“The market had been staring at the news about bitcoins” … but “the news that really shook the market was that (Bukele) manipulated things to run for re-election,” Kevin Daly said , investment director at Aberdeen Standard.
Reforms allowing Bukele re-election are “pretty worrying signals and US must respond”
On Friday, September 3, late at night, the Supreme Court ruled that the president could seek a second consecutive term, a decision condemned by the United States.
On Monday, because it was a public holiday in the American country, the stock markets did not open and it was not until Tuesday 7, just after the start of the Bitcoin Law and the launch of the Chivo Wallet, that investors rushed to sell El Salvador bonds at a low price.
“This is Bukele’s risk premium,” said Siobhan Morden, Latin America’s director of fixed income for Amherst Pierpont, a New York-based financial analysis firm that further argued that the the court’s decision had complicated the chances of El Salvador reaching a new agreement with the IMF and securing access to much-needed external funds for the economy.
“Everything is centralized decision-making and he is not surrounded by a team of top-level technocrats,” he assured.
The IMF has opposed the adoption of bitcoin as a legal tender, citing risks to financial stability, consumer protection and the environment.
“The most direct cost of widespread adoption of a cryptocurrency like Bitcoin is macroeconomic stability… Monetary policy would lose strength. Central banks cannot set interest rates on a foreign currency,” Siobhan wrote in July.
For his part, Ramiro Blazquez, strategist at BancTrust & Co, told Bloomberg: “It’s a purely political risk, which grew after the news of the re-election and had not been discounted,” referring to the fall in bond prices. “It further distances the IMF agreement and could intensify the diplomatic conflict with the United States,” he added.
Siobhan recalled that El Salvador needs between $ 3,500 and $ 4,000 to finance its deficit, cover the costs of the pandemic and refinance existing debt. But their funding possibilities are becoming increasingly difficult.
The last time it issued a $ 1 billion bond was in July 2020 and since that date it has not been able to re-enter the market. “Bukele still has a fiscal deficit of about twice the level before Covid and the debt is 90 percent of GDP.”
Constitutional Chamber imposed by officialdom enables the re-election of Bukele
With a large $ 800 million debt settlement approaching January 2023, the analyst warns that Bukele has limited room for maneuver.
Investors are more expectant of what may happen at the political level. In late July, Moody’s downgraded the country’s credit rating to “junk bonds.”
And even though the IMF allocated $ 400 million more in special drawing rights in the country that go straight to its reserve assets, that would only mean “a short-term relief, but after that, the government could be forced to turn to their citizens to finance themselves “.
“Local creditors (banks) are the lenders of last resort … but if they are unwilling to lend, there may be a shift towards coercive lending,” such as the possible nationalization of private pensions or even controls on capital, ”he warned.
“Or, as Daly said,‘ There’s a real risk that everything will end in tears, ’” he concludes by quoting the Financial Times.
Bitcoin law
And what do investors say about Bitcoin? The same article picks up on some impressions: “The notion that the poor keep their savings in digital currency is absurd. It’s tremendously volatile and you’re talking about the most vulnerable people in the world,” said Michael Schlein, executive director of Action. a non-profit organization that invests in technology for financial inclusion.
Siobhan warned in July that “Without robust measures against money laundering and terrorist financing, cryptocurrencies can be used to launder money.