Bitcoin helped bring El Salvador’s debt down. Now it’s going back

(Bloomberg) –

The crypto-mad crowd is a huge fan of El Salvador’s President Nayib Bukele, a fellow traveler who is making Bitcoin an official currency of his nation.

The bond market has also started to warm up.

El Salvador bonds are rebounding from a defeat that dragged on until early August, when the country was downgraded to scrap and concerns about Bukele’s bitcoin movement and pressure for a constitutional change increased.

In the past two weeks, they have repaid 7.6% more than the dollar-denominated debt of any country other than Zambia, where the new president’s landslide victory fueled speculation that he could lead the country out of default. Still, bonds have lost 12.8% since the last day of trading in April as the country struggled to reach an agreement with the International Monetary Fund.

Carlos de Sousa, investor at Vontobel Asset Management in Zurich, said that the beginning of the trend reversal reflects how deeply the securities have fallen.

“It got to a point where it was ridiculous,” said de Sousa. “There was neutral or even relatively positive news and bond prices continued to slide. As people saw, if there was a headline about El Salvador, Sell, don’t even bother reading it. “

Sow worries

Bukele, 40, raised concerns among investors after his allies in Congress voted in May to sack five of the country’s chief judges. He also urged the president’s term of office to be extended to six years as part of a major overhaul of the constitution.

The perceived seizure of power created a rift with the US that cast doubts as to whether El Salvador could reach a new agreement with the IMF, which also said the adoption of Bitcoin could bring financial and regulatory risks. On July 30, Moody’s Investors Service downgraded El Salvador to seven levels below investment grade, citing controversial guidelines.

The yield on El Salvador’s 2052 bonds rose up to 11% by August 11, from around 8% at the end of April. The yield has now fallen to 10%.

Investors are reassured by the country’s economic strength. The central bank said earlier this month that gross domestic product will grow 9% this year, up nearly three percentage points from its June forecast.

The story goes on

Repositioning

“In a way, this was a turning point, as investors who were disappointed after choosing Bukele have already adjusted their portfolios and are now looking to reposition others or even the same ones, knowing all the drawbacks,” said de Sousa.

In addition, there will be no major foreign debt payments until January 2023, which will give the government time to stabilize its finances. Both Bank of America Corp. and Morgan Stanley now have a positive recommendation on El Salvador’s bonds. Siobhan Morden, head of Latin America Bonds at Amherst Pierpont, said last week that the chances of an IMF deal had risen slightly.

The country’s authorities have tried to address some of the IMF’s concerns about the Bitcoin adoption. The rules released by the central bank last week said it won’t be mandatory for businesses to accept Bitcoin once it becomes legal tender next month. Money laundering laws will also apply to the cryptocurrency, and the so-called Chivo wallet – which allows people to make everyday purchases with Bitcoin – will not be anonymous, making it easier for regulators to track it.

Talks with the Salvadoran authorities “are ongoing and must carefully assess the impact of any new developments since May,” the IMF said in response to questions on Friday. The discussions, which include the implementation of the Bitcoin Act, continue to focus on measures to strengthen economic governance and financial stability, as well as inclusive growth.

“Any further upward trend depends on the program negotiations by the IMF,” said Thomas Jackson, director of fixed income at Oppenheimer & Co. in New York.

(Adds IMF answer in penultimate paragraph)

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