Bitcoin crashes, El Salvador goes bankrupt?

Bitcoin is legal tender in El Salvador, but the currency has been declining ever since.

The Central American country made Bitcoin legal tender last year, but it has continued to decline since then. This raises concerns about whether it will be able to meet its next debt payment.

Bitcoin legal tender in El Salvador

The Salvadoran experiment to make Bitcoin legal currency has hit a wall. There are many reasons for the current decline. Think of the uncertainty of the war in Ukraine. But also rising inflation and the decision of the US Federal Reserve to raise interest rates. As a result, the price of the most popular cryptocurrency in the world has fallen by more than 50% from its all-time highs.

That is why the bonds of the government of El Salvador, which you can currently buy at 40% of their original value, are also under pressure. This is because investors are beginning to doubt whether the country can make its next debt payment.

Implications

Last September announced Salvadoran President Nayib Bukele announced that El Salvador would be the first country in the world to accept Bitcoin as legal tender. This in addition to the US dollar. Rating agencies warned back then that the cryptocurrency’s volatility would have consequences. This for the already fragile government finances of the country. But this didn’t stop Bukele. In October, he announced that the government had purchased nearly $25 million worth of Bitcoin.

This had direct consequences for the country. The ups and downs of the market, coupled with the weakening of institutions in El Salvador, have caused several credit bureaus to downgrade the country. Which is largely used by the market to estimate the probability of default. A low rating means that the government has to pay creditors a higher interest rate, as it is considered a higher risk. With Bitcoin’s price showing a downward trend, experts agree that this also applies to the country.