Rating agency Moody is sounding the alarm over El Salvador’s bitcoins (BTC) purchase.
The purchase of bitcoins (BTC) by El Salvador and its president, Nayib Bukele, continues to turn the heads of some traditional financial institutions. So today, it is the turn of the famous rating agency Moody’s to sound the alarm about El Salvador. Indeed, Moody’s believes that BTC as legal tender increases the risk of the country’s sovereign debt.
Bitcoin (BTC) in El Salvador, a risk for the rating agency Moody’s
More than four months after the official release of BTC in El Salvador, this political choice of President Bukele is still talking. Today, the famous rating agency Moody’s has strong reservations on this subject, without going so far as outright rejection like the International Monetary Fund (IMF).
Rating agencies are organizations whose objective is to assess sovereign debt risk. The latter can be bought on the financial markets by any investor.
The best rating from rating agencies is the famous triple-A (Aaa). The closer the country’s rating is to triple-A, the lower the risk of non-repayment of sovereign debt.
According to Moody’s, El Salvador’s pro-Bitcoin policy poses an increased risk to the country’s sovereign debt, especially since it has suffered financial difficulties in the past. In July, the agency also downgraded El Salvador’s rating to Caa, meaning that Salvadoran government bonds present a very high risk.
However, the downgrading of El Salvador’s rating is not related to adopting the Bitcoin law the previous month. The cause is, instead, as indicated above, the country’s difficult financial situation.
A notice from Moody’s when El Salvador will issue Bitcoin (BTC) bonds
Moody’s notice comes a few weeks after Nayib Bukele officially launched plans for an all-Bitcoin city in his country. The president added that it would be funded by issuing bonds denominated in BTC.
However, buying sovereign debt on the markets is acquired through bonds. Therefore, the rating agency might have targeted this type of bond more, particularly when it mentioned El Salvador’s debt increased risk.
Also, the country of President Bukele has an $800 million bond that matures in January 2023. To date, this bond has a yield of 35%, which is astronomical for a government bond but which also means that the financial markets have little confidence in the repayment of this debt by El Salvador.
However, if the debt is not paid back, the lenders will have lost their entire investment. Therefore, it is unlikely that issuing bonds denominated in BTC can give confidence to the financial markets.