El Salvador’s ‘Volcano Bond’ Could Launch This Week

The IMF remains skeptical of the country’s audacious bitcoin policies

article-image

El Salvador’s Cerro Verde National Park; Source: Shutterstock

share

key takeaways

  • The so-called “volcano bonds” would be the first bitcoin-backed bonds issued by a country
  • The International Monetary Fund has urged El Salvador to remove bitcoin as legal tender, citing volatility and additional risk for the country’s citizens

As El Salvador dives deeper into bitcoin, the country’s closely watched and controversial “volcano bonds” could launch as soon as Tuesday.

Finance Minister Alejandro Zelaya told a local TV channel that “between March 15 and 20 is the right timing,” adding that the country has “the tools almost finished.” 

“But the international context will tell us…I didn’t expect the war in Ukraine,” Zelaya reportedly said.

Launching the bitcoin bond — dubbed the “volcano bond” after the mining operation’s power source, the Conchagua volcano — has become increasingly important due to the country’s slim loan prospects and mounting debt, Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial, said.

No details, regulatory framework or prospectus has been issued regarding the bonds, Marshik pointed out, making it difficult to predict demand for the offering.

“These bonds started as a sovereign bond,” Marshik said. “Now, it is a securitized corporate bond, which [raises] the question of success.”

A loan from the International Monetary Fund (IMF), which has urged El Salvador to remove bitcoin’s status as legal tender, is unlikely, according to Marshik.

“Odds of an IMF loan are nil,” she said. “[El Salvador officials] are going around saying they have a pension reform pending, and they will get a $590 million bond from the pension system.”

Bitcoin poses significant risks to financial stability and consumer protection, IMF executive directors said in January in a statement about El Salvador’s financial health.

“[Directors] stressed that there are large risks associated with the use of bitcoin,” the statement said. “They urged the authorities to narrow the scope of the bitcoin law by removing bitcoin’s legal tender status.”

The IMF expects El Salvador’s fiscal deficit to reach 5.75% of gross domestic product (GDP) in 2021 and about 5% of GDP in 2022. Public debt is also anticipated to rise to about 96% of GDP in 2026. Given the circumstances, the IMF estimates El Salvador is on an “unsustainable path.”

“The IMF forecasts a primary balance for 2022, yet says the debt is unsustainable under current policies,” Marshik said. “El Salvador needs a 3% of GDP adjustment to get the debt to a sustainable level.”

Persistent fiscal deficits and high debt service are leading to large and increasing financing needs, the IMF report noted. 

El Salvador has an $800 million bond maturing in January 2023. In July 2021, ratings agency Moody’s downgraded the country’s debt rating to CAA1 — putting it at risk of default.


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Templates.png

Research

ZKPs enable efficient offchain transaction processing and validation, resulting in increased throughput and reduced fees. Solana's ZK Compression leverages ZKPs to minimize onchain storage costs, while Sui's zkLogin streamlines user onboarding by replacing complex key management with familiar OAuth credentials.

article-image

Plus, a look at planned ETH ETF fees and how they differ from their BTC counterparts

article-image

North Korea suspected in breach of Indian exchange’s multisig wallet

article-image

Plus, Sanctum’s CLOUD token has officially launched — but not without problems

article-image

It’s not yet clear whether Donald Trump is pumping bitcoin. But an unofficial memecoin is still seeing benefit.

article-image

StarkWare takes a step towards making StarkNet for Bitcoin