Bitcoin risk has not materialized in El Salvador

A few days ago Reuters revealed that the International Monetary Fund says Bitcoin-related risks for El Salvador have not materialized.

The IMF explicitly admitted that such risks have not materialized, saying that this is due to the so far limited use of Bitcoin in the country. It also added that the use of BTC could grow, since it is legal tender in El Salvador, with the country’s new legislative reforms encouraging the use of cryptocurrencies and tokenized bonds.

IMF and El Salvador

As of 31 December 2022, it is officially reported that the small Central American country still owed 287 million SDR to the IMF, or about $380 million.

SDR, or Special Drawing Rights, is the Fund’s account currency, the value of which is calculated based on a basket of national currencies. Its original purpose was to replace gold in international transactions.

It is worth noting that El Salvador‘s external public debt is well over $21 billion, so that with the IMF is only 1.8% of the total. In addition, an $800 million bond on which many fears had been focused, expired in January. Whereas the bond was paid in full, on time and without any particular problems, so the country’s financial situation at this time does not look gloomy.

However, it remains critical not only because of past debts, including the debt to the IMF, but also because of uncertainty about the country’s economic future.

It is enough to mention that since El Salvador joined the International Monetary Fund in 1946, it has been forced to ask the Fund for help 22 times.

The fact is that El Salvador’s past has been turbulent to say the least, definitely very problematic. The consequences of that dark past are still being felt today, although for the past few years it seems to have been on a path that could bring it out of the abyss for good.

El Salvador and Bitcoin

This path also passes through the adoption of Bitcoin as legal tender, which has been happening for about a year and a half now, and through which the country is trying to reinvent itself as Latin America’s crypto hub.

The IMF does not seem to believe that this will help El Salvador get out of the abyss for good, but the road seems not only well on its way but also in the right direction.

Indeed, with the exclusion of 2020, when due to the pandemic and the collapse of GDP the country’s total public debt suddenly skyrocketed to 92% of GDP, it has since fallen to just over 80 % in the two years since.

This is still much higher than the 74% in 2019, but if nothing else it seems to indicate rather clearly that the path taken is paying off.

The bond paid off in January also seems to confirm that the strategy put in place by President Bukele to deal with the financial problems is working, although investments in BTC for now are at a loss.

However, it is always worth remembering that El Salvador’s BTC exposure is very small compared to the total amount of public debt, lower even than the outstanding debt to the IMF.

In other words, the Salvadoran state has not invested very much in Bitcoin, probably in the hope that in the long run this relatively small investment would bear far greater fruit.

In total it turns out that there are 2,470 BTC in its coffers, worth about $52 million. Given that the investment was about $106 million, for now the accumulated loss is more than 50%.

Bitcoin bonds

The IMF’s statements are coming just as work has started on the process that should lead to the issuance of Bitcoin bonds, or tokenized bonds with which Bukele wants to raise $1 billion.

Half of these funds should be used to buy more Bitcoin, while the other half should be used to build Bitcoin City.

Of course, the amounts are such that they could exacerbate the risk associated with the volatility of BTC’s market value by no small amount, because that $1 billion will have to be paid back sooner or later.

That is almost 5% of the country’s total external debt, so the figure is starting to become significant, both compared to the $106 million spent so far to buy Bitcoin and the $380 million El Salvador still owes the IMF.

The situation therefore remains critical, although less so than was feared only a few months ago. The fact that the price of BTC has rebounded from the annual lows of November 2022 has helped in no small part to make this situation less critical, even though the risks remain, if slightly mitigated.

It remains to be seen how the International Monetary Fund will behave in the event that El Salvador not only recovers the entire loss caused by its investment in BTC, but even makes a profit.