Fitch Says Bond Buy Won’t Lower El Salvador’s Default Risk

El Salvador has repurchased more than $500 million of its bonds at a huge discount, but that may not lessen its risk of a default at the beginning of 2023.

While the country’s experiment with bitcoin as a legal tender has largely been a failure, with almost no one reportedly using the cryptocurrency as a currency, its biggest impact by far has been on the country’s dismal debt rating.

El Salvador had been in the process of negotiating a loan from the International Monetary Fund (IMF) that would have allowed it to pay off an $800 million eurobond coming due at the beginning of 2023 when it made bitcoin a legal tender alongside the U.S. dollar. That caused the IMF to break off talks, and led bond rating agencies to repeatedly slash the nation’s debt rating.

The most recent was Fitch, which downgraded El Salvador from CCC to CC — leaving it further below the CCC+ level at which the rating agency doesn’t even provide an outlook statement for its likelihood of default. That amounts to calling a default probable, Reuters said.

Another major ratings agency, S&P Global Ratings, left El Salvador’s debt at CCC+, Rueters added, noting that it considers “the debt repurchase opportunistic and akin to a liability management operation.”

It added, “we believe the government could have fulfilled its financial commitments in the near term absent this transaction.”

On Sept. 21, Salvadoran President Nayib Bukele tweeted that the country had completed the advance purchase of $565 million bonds coming due in 2023 and 2025, and had “generated more than $275 million in savings for our country,” in the process.

El Salvador has successfully completed the first advance purchase operation of bonds maturing in 2023 and 2025; managing to repurchase bonds for more than $565 million.

And generated more than $275 million in savings for our country https://t.co/lT20GLG6nd

— Nayib Bukele (@nayibbukele) September 21, 2022

Another repurchase offer will be made in about eight weeks, he said, emphasizing that it was done a “MARKET PRICES” and saying, “El Salvador pays its debts!”

However, the size of the discount reflects how distressed the bonds are.

No Help

The announcement didn’t impress Fitch, however, which said in its Sept. 15 downgrade announcement that the voluntary cash buyback was “at below par” and “will likely further weaken its already strained liquidity position ... The size and scope of the transaction does not materially alter the probability of default in Fitch's opinion.”

In an article about the downgrade and repurchase, local news outlet La Prensa Grafica said the “CC” rating from Fitch meant “they expect El Salvador to default.”

It quoted economist Tatiana Marroquín, who said that it will be very difficult to borrow money at that rating, as “in light of public finances it is very unlikely that we will pay.”

Without that ability, the government’s choices will be to either raise taxes or cut services, she said.

Without a currency of its own, the government cannot take the potentially hyperinflationary tactic of printing money.

Criticism Grows, Popularity Doesn’t Fall

Meanwhile, local news outlet ElSalvador.com noted that a recent article in Barron’s said of the country’s bitcoin experiment, “It’s either the biggest failure or the biggest con.”

Instead of being “a crypto lover’s dream,” Barron’s noted, “it has turned into a cautionary tale of what happens when a country adopts a cryptocurrency, tries to weave it into its economy, and rebrands itself as a tech-friendly haven: It isn’t working as advertised.”

Another article in La Prensa Grafica cited financial services firm EMFI Group saying in a recent report that the “government, as usual, has tried to hide the negative result.”

It’s worth noting that despite the growing potential for a default and economic hardship it might impose, Bukele remains extremely popular after a massive anti-gang campaign.

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