Bitcoin weakness drags down El Salvador bonds

The crisis experienced by the price of bitcoin in recent months has had an impact on the prices of El Salvador’s eurobonds, which have already exceeded $40 in long-term bonds, while the shorter-term bond due in 2023 fell back to support of the $77.

According to the analysis of the specialized brokerage firm Amherst Pierpoint, the low performance of Salvadoran bonds in March and April reflects the skepticism of the market about the possible frustration of the exit of the $1,000 million of the volcano bonds and the general doubts of that bitcoin would provide a solution to short-term liquidity or medium-term solvency risks for the country.

The report highlights that, to date, there has been no foreign direct investment commitment related to bitcoin and overall tourism is still below pre-pandemic levels.

“Possible cancellation of volcano bonds reduces financial flexibility as well as bitcoin-related investment losses.”

Siobhan MorganHead of Fixed Income Strategy at Amherst Pierpont Securities.

“Bond prices at these levels are now morphing into almost pure idiosyncratic risk by quantifying the country’s short-term payment capacity in shorter terms and the probability and timing of default and recovery value in shorter terms.” longer tenors,” says Siobhan Morden, head of Fixed Income Strategy at Amherst Pierpont Securities.

The news of constant cryptocurrency price losses is “certainly not helpful” although most market participants already see it more “as a distraction rather than a solution”.

“The weakness and volatility of bitcoin seriously challenges the growth and financing model for El Salvador,” says the report.

Losses

The head of Fixed Income Strategy at Amherst Pierpont Valores considers that “without a doubt, there is some loss” in the country’s potential financial flexibility due to the postponement of the issuance of the volcano bonds, as well as the $38 million in losses due to spending of about $103 million for the alleged purchase of 2,301 bitcoin by the President of the Republic, Nayib Bukele.

In the event that there is no potential for dividends from the growth of bitcoin (trading at $30,300 at press time) or innovative financing, then the Bukele administration will have to prioritize spending priorities and identify financing options.

But given that “there have been no signs of a shift towards structural fiscal discipline” with the same process of first exploiting all standard financing options (multilateral loans), then cutting current spending and reducing the “stock” of liquidity, The report of the stock market agency warns again about the possibility of “a change towards financial repression” being the local financial actors as lenders of last resort the next alternative if there is no option for the innovative issuance of foreign debt.

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