El Salvador’s credit plummets, Bitcoin may be partly to blame

Shocking folks, it turns out El Salvador’s decision does make bitcoin legal tender wasn’t such a good idea after all.

This week, credit agency Fitch downgraded El Salvador’s debt rating from CCC to CC some 14 months after the company’s tech bro president and budding authoritarian, Nayib Bukele, made Bitcoin a nationally recognized legal currency. That credit, following CoinDesk, stems in part from the country’s embrace of bitcoin that potentially limited El Salvador’s access to markets and in turn made it more difficult for the country to finance bond repayments.

In its report, Fitch said El Salvador’s “tight fiscal and external liquidity positions and extremely limited market access amid high fiscal financing needs,” made some sort of default “likely.” CC, for context, represents Fitch’s fourth worst credit rating and is seven notches below the AAA gold standard.

Although the exact economic factors leading El Salvador to this point are varied, CoinDesk cites a January report from rival credit rating agency Moody’s, which said differences of opinion about bitcoin were hurting the country’s ability to strike a deal with the International Monetary Fund. That disagreement reportetcy reduced the odds that the two would strike a deal to meet an $800 million bond maturity in January 2023.

“The lack of IMF funding will significantly increase the risk of an adverse credit outcome,” Moody’s wrote following Reuters. Moody’s also downgraded El Seelvadors credit rating last year, party in response to the country’s Bitcoin laws, like that claims“weakened governance in El Salvador,” and heightened tensions with international partners.

Bukele signed El Salvador’s so-called bitcoin law in June 2021, making it the first country in the world to recognize bitcoin as legal tender. That definition means Salvadoran retailers can list their prices in bitcoin, and residents can use it to pay taxes. As Gizmodo previously noted, the bitcoin law is also a potential boon for wealthy people who want to avoid capital gains taxes on their crypto earnings. By passing the law, Bukele argued that bitcoin could improve the lives of an estimated 70% of Salvadorans who do not have access to traditional financial services.

At the same time, only about 55% of Salvadorans had internet access in 2020 following World Bank data, with an even smaller proportion likely owning cryptoassets. In response to the stark availability gap, Bukele offered each citizen $30 in bitcoin as an incentive to download and register the government’s “Chivo” cryptocurrency app.

Over a year later, it still doesn’t seem like the average Salvadoorians rush to embrace crypto. A March examination conducted by the Chamber of Commerce and Industry of El Salvador found that a whopping 86% of businesses had never completed a transaction with bitcoin. Instead, over a thousand Salvadorans filled the streets of San Salvador last September protest Bukele’s Bitcoin Law.

Regardless, Bukele is apparently still going all in on bitcoin, with the executive even pushing designs for a whole “bitcoin city” with a massive mining operation powered by volcanic geothermal energy. Early concept images of the city show a sprawling urban area caked in Trump gold with a central plaza that will look like, yes you guessed it, a bitcoin symbol.

Bukele’s remained committed to bitcoin even as its value continues to fall in one of the biggest and longest cryptocurrency downturns of all time. To insert it perspective, in June, the Salvadoran government’s total bitcoin holdings allegedly fell 57% in value from the same time last year. Where a normal manager would presumably cut his losses, Bukele instead bought the dip. The Salvadoran government reportedly bought another 80 bitcoins over the summer.

“It’s clear that President Bukele’s bullishness is not being dampened by Bitcoin’s nearly 60% year-to-date decline,” 22V Research technical analyst John Roque wrote in a note. seen by Bloomberg. “It wouldn’t surprise us if he remains bullish when bitcoin trades to our $10,000 target.”