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Fitch Downgrades El Salvador to ‘CCC’ Weeks Before Bitcoin Bond Issue

source-logo  coindesk.com  + 11 more 10 February 2022 08:00, UTC

Ratings agency Fitch has downgraded El Salvador’s long term foreign currency issuer default rating (IDR) to ‘CCC’ from ‘B-’ weeks before the country starts issuing its bitcoin bond.

  • The downgrade reflects “heightened risk stemming from increased reliance on short-term debt, limited scope for additional local market financing, uncertain access to additional multilateral funding and external market financing given high borrowing costs” Fitch said in a report on Wednesday.
  • The South American nation faces close to $1.2 billion in external debt amortizations in 2023, with $800 million due in January, Fitch noted. Fitch also said that the country faces a financing gap of $1.2 billion in 2022, which would rise to $2.5 billion in 2023.
  • “There is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubts surrounding an IMF program, as well as the capacity to issue "bitcoin-backed bonds," the rating agency said.
  • El Salvador’s bitcoin-denominated Volcano Bonds offer a 6.5% coupon compared to the 13% benchmark 10-year yield on El Salvador’s outstanding government bonds.
  • Analysts previously told CoinDesk that the bonds are effectively a giant long on bitcoin rather than an expression of confidence in the financial prudence of Nayib Bukele’s government.
  • “Anyone buying this bitcoin-backed bond is betting on the cryptocurrency in a very big way, ignoring the credit market currently signaling that El Salvador is very much facing a distressed-debt situation,” Marc Ostwald, chief economist and global strategist at ADM Investor Services International (ADMISI), previously told CoinDesk.
  • At the same time proponents of the bond program, such as Samson Mow, the founder of Blockstream, the company that developed the bond, said that bitcoin is a way to disintermediate the sovereign debt market and give El Salvador access to cheaper capital.
  • El Salvador’s bitcoin bond program is expected to be implemented by March 15, according to its finance minister.
  • Moody’s lowered the country’s foreign-currency issuer and senior unsecured ratings to Caa1 from B3 in July of last year, citing El Salvador’s adoption of bitcoin as legal tender.
  • Bukele has previously tweeted, colorfully, that he doesn't care about the opinions of ratings agencies, renaming the country 'El Hodlador' in a meme.

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