Bitcoin’s price falling as much as it has in the past few days is putting pressure on El Salvador. El Salvador’s dollar-denominated bonds have been falling in free fall for the past few months. The country’s president, Nayib Bukele, hopes to change its economic reality by issuing Bitcoin denominated bonds.
However, Steve Hanke, a professor of applied economics at John Hopkins University, has warned that president Bukele’s continued alliance with Bitcoin could be very costly for the country’s economy and the state of its dollar-denominated bonds. He called out Bukele’s often Bitcoin purchases, saying that the president should “gamble” on Bitcoin with his money and not taxpayers’ funds if he was so interested in Bitcoin.
Steve Hanke first raised concern over the state of the country’s bonds in December after Bukele announced plans to issue $1 billion worth of Bitcoin denominated bonds. Half of the proposed amount that the bond issuance will raise will be used to finance the construction of a Bitcoin City, while the other half would be used to purchase more Bitcoin for the country’s reserve.
The professor’s latest warning is coming after El Salvador recently announced that it was sending about 20 bills to its legislature that would give the Bitcoin bonds legal backing. Hanke, who has advised emerging market nations on currency issues, has not missed any previous chance to criticize El Salvador’s adoption of Bitcoin. He has described the Bitcoin adoption move in very strong terms including “insane” and “irresponsible.” His sharp criticisms have not gone without a response from Bukele who has pointed out that the country’s investment in Bitcoin has been doing well.
The situation of El Salvador’s bonds and how Bitcoin can help
Indeed, El Salvador’s dollar-denominated bonds have been struggling since Bukele announced the plans to issue Bitcoin bonds. As of November 2021, El Salvador’s bonds that are to mature in 2023 slid past its May all-time high. This resulted in the yield rising above 17% from around 6.3% at the time according to data from Boerse Frankfurt. The country’s debt is still trading in the distressed territory, meaning that the country is likely to default or is already defaulting in its security status.
However, analysts have noted that the announcement of Bitcoin bonds has not been the only factor that played a role in the sliding bond rate. According to Marc Ostwald, chief economist at London-based ADM Investors Services International, the bonds of other emerging economies are also facing the same plight due to concerns over COVID-19 and the plans of the US Federal Reserve Bank.
“There has been a sharp widening of spreads between the emerging market bond yields and Treasury yields in the past two weeks and an uptick in yields on investment-grade and high-yielding bonds,” Ostwald told CoinDesk last month.
However, the Bitcoin bonds the country plans to issue could be instrumental in bringing El Salvador out of the rut. This is because Bitcoin remains an attractive prospect for investors as the asset has been the best performing asset of the last decade. The Bitcoin bond, which Nayib Bukele recently predicted will be oversubscribed when it launches, will allow investors to bet on the potential price surge of Bitcoin. The President remains bullish on Bitcoin, predicting recently that the asset will smash $100,000 in the near term.
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