Credit risk

Bukele’s Bitcoin Trade Increases El Salvador’s Sovereign Credit Risk: Moody’s

El Salvador’s historic adoption of bitcoin (BTC) 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 struggled with liquidity issues in the past.

Under the leadership of President Nayib Bukele, 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 treasure chest of 1,391 BTC, with President Bukele famous for repeatedly “buying the dip” using Bitcoin’s volatility to add to 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 issuer’s repayment capacity and tax profile,” he said.

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

Related: Tonga to copy El Salvador bill making bitcoin legal tender, says ex-MP

Attacks on El Salvador’s Bitcoin Gambit by legacy 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 the cryptocurrency’s alleged environmental and transparency issues.

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.