El Salvador able to repay the bond
- El Salvador has completed payments on its outstanding $800 million bond following concerns it could default on its decision to make Bitcoin legal tender.
- Regardless, the country still owes $367 million plus interest on an $800 million bond due in 2025.
El Salvador’s Finance Minister Alejandro Zelaya has revealed that the country has completed payments on its outstanding $800 million in bonds following concerns that it may default on its decision to make Bitcoin legal tender. The bond was due this week and the country was able to meet its debt obligations. Regardless, El Salvador still owes $367 million plus interest on an $800 million bond due in 2025.
In addition, the finance minister revealed that the country has paid back 196 million dollars in debt last year. This was done through a partial buyback of the bond due this week. It may be recalled that the rating agency Fitch downgraded El Salvador’s government debt in September from “CCC” to “CC”. This indicates that a debt default is likely.
El Salvador became the first country to declare Bitcoin as legal tender after President Nayib Bukele managed to convince the parliament amid several warnings from the international community. This month, the country secured a $350 million loan from the Central American Bank for Economic Integration.
It is quite unclear whether this or the money from Bitcoin Investment helped the government pay off the bond. The Central American Bank for Economic Integration stated that it would
strengthen the management of the state’s income and expenditure through measures to reduce the tax gap and increase tax collection, as well as reduce smuggling and tax evasion.
The IMF issues another warning to El Salvador about its Bitcoin decisions
The country has been very confident in its decision to integrate Bitcoin into the financial sector. However, the International Monetary Fund (IMF) continues to issue warnings. After a recent visit by IMF staff to the country, they observed that the Bitcoin risk to the country has not materialized yet. This is said to be due to the limited use of the decentralized asset.
According to them, Bitcoin poses a risk to the country’s fiscal sustainability and consumer protection in addition to its financial integrity and stability. They advise El Salvador to address these risks as use may increase. They have also been asked to reconsider the decision to tokenize bonds.
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Given the legal risk, fiscal fragility and largely speculative nature of crypto markets, governments should reconsider their plans to expand government exposure to Bitcoin, including by issuing tokenized bonds.
On January 11, it was reported that a legal framework for Bitcoin-backed bonds in the country called “Vulcano bond” has been established. According to the government, the bond will be used to pay down the national debt as well as finance the proposed “Bitcoin City”. The country has plans to attract crypto investors and the proposed Bitcoin City is part of the strategies. Many concerns have been linked to the possible use of Bitcoin for criminal activities. Previously, the El Salvador government stated that it would use 2023 to address all crypto-related criminal activities. This is part of the reason for the opening of the National Bitcoin Office in El Salvador according to Guillermo Contreras, CEO of DitoBanx.
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