El Salvador creditors should hope Volcano bond plans turn to ash
A Bitcoin bond that crashes and burns would be better for bondholders than one that struggles across the line
Salvadorean president Nayib Bukele’s Bitcoin agenda is one of a handful of apparently insurmountable sticking points that have burned any hopes of an imminent agreement with the IMF.
Given most creditors would love El Salvador to thrash out a deal with the multilateral, it was surprising to see international bondholders warm to Bukele’s big idea, announced in November, to sell Bitcoin-linked bonds to fund purchases of the cryptocurrency and the development of a volcano-powered “Bitcoin City”.
Despite the government claiming it has already garnered more demand than it needs for the $1bn offering, the initially indicated issuance window of March 15-20 came and went without so much as a prospectus.
Finance minister Alejandro Zelaya’s first explanation for the delay was Russia-related volatility, but president Bukele is now saying he wants to prioritise pension reform.
As Siobhan Morden, head of LatAm strategy at Amherst Pierpont, wrote on Monday, the delay of the Bitcoin bond launch has triggered “renewed investor jitters”.
But while there are plenty of reasons for holders of El Salvador’s Eurobonds to be jittery, this delay is not one of them.
Liquidity boon unlikely
One major El Salvador bondholder told GlobalCapital last week he’d be “delighted” if the Bitcoin bond went well. To be clear, this is not because he wants to buy it. There’s no danger of an institutional investor taking on El Salvador debt with a 6.5% coupon when the sovereign’s 7.75% January 2023s are trading in the low 80s.
Rather, when bondholders say they want the Bitcoin bond to succeed, all they mean is that they want the cash-strapped country to discover some amazing new source of liquidity.
To fully flesh out the theory: if El Salvador can raise loads of money by issuing Bitcoin bonds, it can then start paying off its Eurobonds. The president can declare El Salvador’s independence from the tentacles of the global financial system, and the global financial system can bid El Salvador good riddance.
Observers may have differing views on whether that would be good news for the people of El Salvador.
But it would certainly be one less headache for EM bond buyers. And if the Bitcoin bond escape route works for El Salvador (and its institutional creditors) it could presumably also work for other distressed sovereign nations.
Alas, there is little chance that this optimistic scenario will be the one that plays out.
Sure, Bukele’s Bitcoin antics have earned him plenty of fans among cryptocurrency devotees. It therefore seems plausible that he would be able to cobble together some kind of deal — even if the prospectus were no more than a hasty print-out of a slide from his November presentation.
However, it was established right from the start that the only logical reason to buy this bond would be an innate desire to support Bukele’s Bitcoin agenda. Anyone wanting to bet purely on the price of Bitcoin would gain far more upside from buying the cryptocurrency itself. If, on the other hand, one was looking for exposure to El Salvador, the conventional bond market offers far greater returns than 6.5%.
And so, with no economic incentive to invest in this bizarre instrument, it is highly unlikely to turn into a recurring source of liquidity.
Moreover, Bukele has proven to be a law unto himself. Logically, if El Salvador were able to raise the cash to repay its Eurobonds, it would make little sense to default on them. But who is basing their actions on logic? Not the Salvadorean government.
Worst of both worlds
Bondholders should really be hoping that the plans for the Bitcoin bond are not just kicked into the long grass but dropped deep into the crater of the Conchagua volcano that is supposed to power Bitcoin City.
If the bond goes up in smoke, so might Bukele’s far-fetched Bitcoin-related economic plans, and the government would have to face reality. A more orthodox economic policy would then be required to open doors to new financing.
As things stand, we may be on course for the worst possible outcome. There’s a decent chance that the Bitcoin bond is neither a roaring success that leaves El Salvador with plenty of cash to repay its Eurobonds, nor a complete flop that forces a comprehensive rethink.
If the deal limps over the line, it could be enough to encourage Bukele to push harder with the Bitcoin agenda, distancing his country further from conventional sources of funding, but not enough to allow El Salvador to repay its debt. For bondholders, that would be the worst of both worlds.