Morgan Stanley proposes to buy El Salvador’s damaged bonds after Bitcoin bet fails

El Salvador’s President Nayib Bukele’s bet on Bitcoin (BTC) appears to be backfiring under the influence of the recent crash in the cryptocurrency market, which prompted US investment bank and financial firm Morgan Stanley to encourage its investors to buy the country’s underperforming bonds.

According to a note by Simon Waever, the global head of emerging market sovereign strategies at Morgan Stanley (NYSE: MS ), the market has “over-punished” the $7.7 billion in Eurobonds held by the Salvadoran government, regardless of whether the country feel better. calculations than other troubled peers, Bloombergs Maria Elena Vizcaino reported on July 19.

As Waever explained:

“Markets are clearly pricing in a high probability of the autarky scenario where El Salvador defaults, but there is no restructuring.”

Effects of poor market conditions

In fact, the price of Bitcoin has fallen by close to a third of its value since its all-time high in November 2021, leading to losses of around 48% for the Central American nation, which currently holds around $56 million in Bitcoin.

Consequently, El Salvador’s 2027 bond has fallen 32 cents on the dollar to 28 cents in 2022, falling to a record low of 26.3 cents on July 15.

In Weaver’s view, the debt should trade at an average of 43.7 cents on the dollar, even if the nation is headed for default. However, he admits that the chances of touching this level in the near future were low in the face of tightening global liquidity.

According to the report, the market pessimism is partly due to President Bukele’s erratic decisions, such as making Bitcoin legal tender, announcing a failed dollar bond sale linked to the digital asset and dismissing some of the country’s top judges.

Restructuring possibilities

Furthermore, Waever also believes that the International Monetary Fund (IMF) should have a role in any potential restructuring:

“For a restructuring to work, it almost always needs the IMF to be involved, and or that there is clear pressure for reform from the government. (…) Given that this may not be the setup in a potential restructuring, it could easily end up being a protracted negotiation.”

El Salvador’s Finance Minister Alejandro Zelaya had announced the planned issuance of a Bitcoin-backed bond for the end of March.

However, Bukele has been announcing it since November 2021, pledging half of the $1 billion raised toward building energy and Bitcoin mining infrastructure, and the other half toward increasing El Salvador’s crypto assets, Finbold reported.