El Salvador to buy back $1.6B in sovereign bonds amid speculations of default

YEREVAN (CoinChapter.com) — El Salvador wants to buy back about $1.6 billion in sovereign bonds at market prices.

The decision comes amid speculations that the country could default on its debt. To make this possible, Nayib Bukele, the Bitcoin (BTC)-loving president of El Salvador, has sent two bills to Congress to ensure his Government has enough funds available to make the purchases. 

Bukele’s Twitter post says he plans to buy back all sovereign debt bonds maturing in 2023 and 2025.

However, owing to the pending paperwork, he expects the purchasing operations to begin in six weeks. 

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All that talk about El Salvador is defaulting

Over the past months, talk about El Salvador’s Bitcoin policy backfiring has intensified. The country leads the list of developing nations that risk defaulting on their sovereign debts, according to a recent report by Bloomberg.

Several other overburdened economies, including Ghana, Pakistan, Egypt, and Tunisia, face a similar risk.

As per the agency’s assessment, distressed debt to the tune of a quarter million dollars looms on the heads of these developing nations. 

Bloomberg also quoted World Bank Chief Economist Carmen Reinhart, who echoed similar sentiments. 

“With the low-income countries, debt risks and debt crises are not hypothetical. We’re pretty much already there,” 

Reinhart said.

The total debt in distress owed by developing economies to international bondholders is around $237 million. This marks around 17% of the total $1.4 trillion outstanding external debt among the said nations.

As CoinChapter reported last November, Bukele had announced plans to partner with digital assets firm Blockstream to raise $1 billion for U.S. dollar-denominated 10-year bonds.

The decision, which the Government later postponed, sent El Salvador’s original dollar-denominated bonds into freefall, hitting an all-time low.

In May, Bond credit rating company Moody’s downgraded the country’s debt rating into junk territory.

El Salvador has enough to pay for bonds

According to Bukele, who once called himself “The coolest dictator in the world,” El Salvador has enough money to pay for its sovereign debts.

“Contrary to what the media has been saying all this time, El Salvador has the liquidity not only to pay all of its commitments when they are due but also purchase all of its own debt (till 2025) in advance,” 

Bukele said. 

According to Financial Times, the value of El Salvador’s sovereign debt rose on the news. Bonds maturing in 2023 rose 10 cents on the dollar to change hands at 86 cents. Meanwhile, bonds in 2025 spiked nearly 14 cents to trade at 49.6 cents on the dollar. This is the highest rise since April. 

Meanwhile, Alejandro Zelaya, the country’s Finance minister, has claimed the government plans to pay for the buyback using special drawing rights from the IMF. 

In addition, the Central-American nation will also bag a $200mn loan from the Central American Bank for Economic Integration.

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El Salvador in losses from Bitcoin purchases

Since Nayib Bukele made BTC legal tender in the country last September, El Salvador has spent over $100 million on crypto purchases. The country has “bought the dip” on 12 occasions. The Central American nation now holds 2,381 Bitcoin in its reserves. 

However, Bukele’s Bitcoin experiment placed his country at loggerheads with the International Monetary Fund. The international financial body had urged the country to dump BTC as legal tender. 

The IMF threatened not to issue any loans to El Salvador if he continues his Bitcoin-friendly policy. 

Meanwhile, Bukele’s Bitcoin-buying spree continues to bring losses for the country. According to the tracking site nayibtracker.com, El Salvador’s losses from Bitcoin amount to over $56 million. The country’s BTC portfolio is down nearly 53%.

Despite all the losses and reports of doom and gloom, President Bukele continues to enjoy the population’s support. 

A recent Cid Gallup poll showed Bukele received an 86% approval rating. That is the highest performance among all Latin American presidents.

The recent news has also received a positive reaction from citizens. 

“Amazing job, Mr. President, thanks for all what you do for our loved El Salvador,” 

one citizen wrote. 

Meanwhile, it remains to be seen if Bukele successfully secures the necessary funds for the bond buyback. If he fails, fears of El Salvador’s debt default could become a reality.