Bitcoin’s sharp decline in recent months (more than 50% from its all-time high) can be painful for investors, especially those who can’t hold off without selling without waiting for a possible rise. But it can’t be as bad news for anyone as it is for El Salvador, the first country in the world to accept it as legal tender since September 2021.

The country’s president, Nayib Bukele, took a decision. in all By developing its own electronic wallet Chivo Wallet to this cryptocurrency and collecting bitcoins at the time of delivery to give bonuses to citizens, the equivalent of 30 dollars per person. According to the Salvadoran government, the idea behind this move was to create job opportunities by reducing costs and attracting tourists. Again, the bet is not going well this first year. And things could get worse in 2023.

sinking bonds

According to a study conducted by the National Bureau of Economic Research, only one-fifth of Salvadorans who downloaded the Chivo Wallet app continued using the app after spending the $30 bonus provided by the government.

However, the government continued to announce plans along these lines, such as blockchain-based “volcano bonds” – paralyzed by the little attention paid to them – to fund itself to buy more cryptocurrencies, or a coastal city called “Bitcoin City”. . mining bitcoin with virtually no energy costs, without income taxes or contracts with your own geothermal plant. Although not very profitable, mining using volcanic energy was started by taking advantage of existing facilities.

These initial setbacks, along with the collapse in the value of the cryptocurrency (40% since its launch as legal tender that prompted the government to buy 500 more), led to another plunge in the prices of government debt. .

The bankruptcy of their bonds is close to 30%, and 40% for those due in 2032, a sign that markets perceive this debt as a high risk and possible default scenario. Only Ukraine, a country at war due to the Russian occupation, suffered a greater decline in debt securities.

Corporate and credit back

Fitch Ratings downgraded El Salvador’s debt rating from B- to CCC, the lowest level before pure speculation. The scenario of defaulting on your debts is known as a “transition.” default”means loss of access to finance in markets.As in 2012 in Greece ($138,000 million) or in the private sector in 2008 with Lehman Brothers ($600,000 million that crashed the world economy like the first domino).

Moody’s remains at a high level of risk as it awaits details of the recently announced pension system reform, but has given a minimal margin of confidence to face the payment of the $800 million 2023 bond within seven months. something that could stimulate the economy to deal with debt for months at the expense of its retirees’ loss of purchasing power.

In the weeks prior to the cryptocurrency’s enactment as a national currency accompanying the US dollar, there were protests in the streets, both because of the volatility inherent in Bitcoin since its birth and the possible money laundering they feared. could produce. Neither of the two national currencies is issued by the country itself.

the first factor triggers uncertainty about the true value of salvadorans’ savingsIt has since been noted, but in the event of a hypothetical increase in value, it could reverse its situation if it doubles its price in dollars, like at the end of 2017 or 2020.

The IMF didn’t take long to recommend reversing its decision to nationalize bitcoin, something that also suits its interests as a central currency stabilization agency, warning that it could violate the conditions it has set for loan-seeking countries. It includes overcoming the problems that lead to this situation and serve to guarantee the repayment of the borrower. Something the IMF understands does not happen in a cryptocurrency-based economy, and therefore, inability to access more financeeven if you didn’t enter default.

The World Bank, for its part, also refused to assist the country in the deployment of Bitcoin. An institutional veto that doesn’t help its future, especially with Bitcoin bonds that haven’t attracted a single investor. The financial instability warned by these global institutions had intensifying risks.