El Salvador’s dollar debt dives on Bitcoin bond plans

El Salvador’s dollar-denominated debt has fallen to an all time low since the Central American nation’s debt began trading in “distressed terrain” this week.

After news this weekend that El Salvador would use Bitcoin (BTC), bonds to finance its Bitcoin City initiative, El Salvador’s USD bond fell to 64.4 Cents per dollar Monday, Nov. 22. According to Bloomberg data, dollar bonds have been falling steadily since April 2021, when they reached $1.10.

A dollar-denominated bonds is a bond that has been issued by a foreign government or company outside the United States. It is denominated instead in their local currency.

Bloomberg reported Monday’s drop in debt performance caused it to be among the worst performing countries in global trading. Investors are worried that President Nayib Bakele has stopped the IMF from providing assistance to the country with development funds.

Managing Director of investment banking company Stifel Nicolaus, Nathalie Marshik, commented that “this announcement cements the ‘anything-but-the-IMF’ path,” before adding that bonds are falling “as the market reassesses possible recovery value lower on the unpredictability of policies.”

After the initial costs of its mining infrastructure are recovered, the Bitcoin bond will pay 6.5% annually interest and 50% of El Salvador’s Bitcoin profits. According to Samson Mow (Blockstream’s Chief Strategy Officer), dividends will be paid either in USD or Tether ($USDT).

Mow believes the Bitcoin bond will offer institutional investors an alternative to holding Bitcoin. Investors will be able to aid El Salvador’s rapid development through this bond. Mow, who worked with the El Salvador government to develop the Bitcoin bond, spoke to Bloomberg TV on November 23rd.

“We are trying to structure it in a way that people [the Bitcoin bond] can present to boards and directors like a normal bonds because it is a regular bond.” It simply happens to be tied in with a large amount of Bitcoin.”

Anthony Pompliano, a podcaster and Bitcoin advocate, predicted that they would be “ridiculously undersubscribed” in response to Mow’s interview with Bloomberg.

PREDICTION: The El Salvador bitcoin bond will be ridiculously oversubscribed pic.twitter.com/2Kj0urm0SN
— Pomp (@APompliano) November 23, 2021

El Salvador is currently in negotiations with the International Monetary Fund for a $1.3 billion loan. These talks may be lost in the shuffle as President Bukele decided to finance more local initiatives such as school building with Bitcoin than USD.

Related: El Salvador will build 20 “Bitcoin Schools” with the surplus of Bitcoin Trust

On Nov. 22, the IMF released a final statement on El Salvador’s request for funding. It stated that El Salvador’s economy is recovering quickly from the pandemic but that fiscal deficits, high public debt and a lack of financial services create bigger gaps in the services it can offer.

According to the report, efforts to increase financial inclusion and growth are welcomed, but there are risks associated with Bitcoin as a legal currency, the new payments system, and trading in Bitcoin.

These risks are why Bitcoin should not be used to pay for legal transactions. Staff suggests limiting the Bitcoin law’s scope and urging the strengthening of regulation and supervision over the new payment system.