• El Salvador has completed payments of its $800 million outstanding bond following concerns that it could default due to its decision of making Bitcoin a legal tender. 
• Regardless, the country still owes $367 million plus interest on an $800 million bond due to mature in 2025. 

El Salvador Treasury Minister Alejandro Zelaya has disclosed that the country has completed payments of its $800 million outstanding bond following concerns that it could default due to its decision of making Bitcoin a legal tender. The Bond was due to mature 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 to maturity in 2025. 

In addition, the Treasury minister disclosed that the country has paid back $196 million in debt last year. This was done through the partial buyback of the bond which was supposed to mature this week. It can be recalled that rating agency Fitch downgraded El Salvador’s sovereign debt in September from “CCC” to “CC”. This indicates that a debt default is probable. 

El Salvador became the first country to declare Bitcoin a legal tender after President Nayib Bukele managed to convince the parliament amidst 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 made from Bitcoin Investment helped the government to pay off the bond. The Central American Bank for Economic Integration stated it was to

strengthen the administration of government revenues and expenses through measures to reduce the tax gap and increase tax collection, as well as reduce smuggling and tax evasion.

IMF issues another warning to El Salvador on its Bitcoin decisions

The country has been very certain about its decision to integrate Bitcoin into its financial sector. However, the International Monetary Fund (IMF) keeps issuing warnings. After a recent visit of IMF staff in the country, they observed that the Bitcoin risk to the country has not materialized yet. This is said to be due to its limited use of the decentralized asset.

According to them, Bitcoin imposes a risk on 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 its use could grow. They have also been advised to reconsider the decision to tokenize bonds.

Given the legal risks, fiscal fragility and largely speculative nature of crypto markets, the authorities should reconsider their plans to expand government exposures 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 the “Volcano bond” has been established. According to the government, the bond would be used to pay down its sovereign debt in addition to funding its 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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