EL Salvador has been in the news more now than I've ever seen in my life, I am guilty of never paying attention to the country apart from the gang infestation of the MS13 and that's as far as my knowledge of the country went.
Once it became the first country to make bitcoin legal tender and begin to attract bitcoiners to El Salvador, I started to pay attention to the country. The next step for the country was to start its own mining operation and now launching bitcoin-backed bonds.
As the country continues to find itself with bitcoin and bitcoin adjacent products, it's lowering its debt obligations and its reliance on international lenders like the IMF. We've seen the IMF issue a plea to the country to reconsider their decision to use bitcoin as legal tender and that was met with a resounding no by the president on Twitter.
Rating agencies snapback
One of the largest rating agencies in the U.S., Fitch Ratings, which externally grades financial products has downgraded El Salvador’s long-term default rating. El Salvador bonds have been downgraded to deeper status, the agency has openly cited the risks from adopting bitcoin as legal tender the key reason.
The rating agency explained:
In Fitch’s view, weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023.
The rating agency also said that “heightened financing risks stemming from increased reliance on short-term debt” ahead of an $800 million global bond payment due next January influenced its decision to cut El Salvador’s rating.
Not the first downgrade
Fitch follows another rating agency as we saw in July 2021, Moody’s Investors Service downgraded the government of El Salvador’s long-term foreign-currency issuer and senior unsecured ratings from B3 to Caa1.
Moody's stated that El Salvador’s “outlook remains negative,” citing concerns over the use of bitcoin as legal tender in the country.
Ratings don't set credit risk
Now ratings downgrades do sound like a horrible thing and it can be, if you're heavily backed by certain funds that require you to hold a certain rating, but El Salvador was never really investment grade so it hardly affects them. And since they're not looking to raise much capital in the traditional system, it's not exactly a pain for them.
In addition, ratings don't mean much these days, Canada for example is rated AAA but their bonds are far from investment grade if we look at the yield and risk you're taking.
Ratings are one measurement, but interest rates are the real measure of borrowing risk, and with El Salvador able to raise cheaper capital with its bitcoin bonds versus its old bonds it doesn't seem like an issue for them.
If anything they could refinance all their old debt into these new bonds and have lower coupon payments. As a bitcoiner, you need to be a FUD buster and look past the headlines and deeper into the meaning or you may get knocked into making bad trades.
I say bring it on, keep attacking bitcoin and bitcoin proponents, because we can take it.
Source:
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