Bukele’s Bitcoin Trading Raises El Salvador’s Sovereign Credit Risk: Moody’s

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El Salvador’s historic Bitcoin (BTC) membership could negatively impact 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 bet “certainly adds to the risk portfolio” of a country that has had liquidity problems in the past.

Under President Nayib Bukele’s leadership, El Salvador recognized Bitcoin as legal tender and issued a state-run crypto wallet to facilitate payments, transfers, and ownership. Along the way, El Salvador amassed a 1,391 BTC treasure chest, with President Bukele known to repeatedly “buy down” using Bitcoin’s volatility to increase his country’s holdings.

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

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

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Attacks on El Salvador’s Bitcoin betting by traditional 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 alleged environmental and transparency concerns.

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Nonetheless, El Salvador remained committed to embracing Bitcoin and creating an attractive environment for crypto investors and entrepreneurs. Last week, Finance Minister Alejandro Zelaya said the country’s Bitcoin law had already attracted foreign investment.