In defiance of traditional financial wisdom and rating agencies, El Salvador, the first country to adopt Bitcoin as legal tender, has seen its junk-rated bonds surge by 62% in the last six months. Despite Moody’s and Fitch downgrading El Salvador’s debt rating and predicting a debt default in January 2023, the market has expressed a different sentiment.
El Salvador’s bonds, due in 2027, are now trading at 72 cents on the dollar, exceeding the performance of the Invesco Emerging Markets Sovereign Debt ETF (PCY), a significant holder of the country’s debt. This rally coincides with the significant rise in the value of Bitcoin, which has seen a 79% increase during the same period.
El Salvador’s Bitcoin Experiment Surprised Skeptics
In a surprising turn of events, El Salvador announced in January that it had repaid an $800 million bond, contradicting Moody’s prediction. The financial upturn followed the country’s investment in Bitcoin starting September 2021, and as of April, El Salvador reportedly holds 2546 Bitcoin, bought for $108.2 million and currently worth $76.6 million.
Additionally, El Salvador has attracted a $1 billion commitment from Volcano Energy to construct a 241-megawatt Bitcoin mine in the country’s Metapán region, with investors such as Tether, the issuer of USDT.
Despite these positive financial developments, El Salvador’s Bitcoin adoption has been met with consistent criticism from rating agencies and the International Monetary Fund (IMF). Citing the “largely speculative nature of crypto markets,” the IMF called for the Salvadoran authorities to reconsider their plans to expand government exposures to Bitcoin.
What Does The Future Hold?
Regardless of the reservations from international bodies, the surge in Salvador’s bonds could indicate a broader market trend. Junk-rated bonds from countries such as Turkey, Argentina, and Nigeria have also outperformed investment-grade bonds this year, prompting a reevaluation of conventional economic theories and the role of cryptocurrencies in sovereign economies.
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