Casey Wagner

<div id="highlights-block_623b30beda87c" class="highlights">
 <ul>
 <li>El Salvador is changing its approach to the bond issuance, delaying and modifying the previously announced plan</li>
 <li>The successful roll out of bitcoin mining is seen as key for President Nayib Bukele’s government as prospects for International Monetary Fund funding are slim</li>
 </ul>
 
</div>



El Salvador has postponed the issue of its highly anticipated volcano bonds, which were originally slated to be issued by March 20, according to Finance Minister Alejandro Zelaya.&nbsp;



Nayib Bukele, El Salvador’s president, introduced the bitcoin-backed bonds in November 2021. They are supposed to raise $1 billion for the Central American nation’s “bitcoin city,” a community at the foot of the <a href="https://en.wikipedia.org/wiki/Conchagua_(volcano)" target="_blank" rel="noreferrer noopener">Conchagua volcano</a>, complete with mining operations and low taxes, Bukele promised.



Zelaya told bondholders earlier this month that the bitcoin bonds will now be backed by La Geo, a state-owned thermal company, according to Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial.



Zelaya had previously stated that the war in Ukraine might impact timing of the bond issuance, with market appetite for risky assets dwindling.



The bonds will be issued on the Liquid Network, a Bitcoin layer-2 established by <a href="https://cms.blockworks.co/?s=blockstream" target="_blank" rel="noreferrer noopener">Blockstream</a>. While Blockstream is providing the technology, it is not working directly with the El Salvador government on the bonds, a spokesperson from the company said.



Launching the bond is still essential for combating El Salvador’s slim loan prospects and mounting debt, Marshik said. The International Monetary Fund has <a href="https://cms.blockworks.co/el-salvadors-volcano-bond-could-launch-this-week/" target="_blank" rel="noreferrer noopener">made clear its disdain</a> for the adoption of bitcoin as legal tender.



The postponement comes as speculation around other Latin American countries leaning into digital assets swells. <a href="https://digitnews.in/the-president-of-honduras-may-announce-the-legalization-of-bitcoin-in-the-country-tomorrow/" target="_blank" rel="noreferrer noopener">Honduras</a> or Malaysia may become the second nation after El Salvador to adopt bitcoin as legal tender, <a href="https://www.thestreet.com/investing/cryptocurrency/malaysia-may-be-the-next-country-to-make-bitcoin-legal-tender" target="_blank" rel="noreferrer noopener">according to news reports</a>.



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El Salvador Delays Volcano Bond Issue, Unveils State-owned Company Backing

<div id="highlights-block_622f9bc254635" class="highlights">
 <ul>
 <li>The so-called &#8220;volcano bonds&#8221; would be the first bitcoin-backed bonds issued by a country</li>
 <li>The International Monetary Fund has urged El Salvador to remove bitcoin as legal tender, citing volatility and additional risk for the country’s citizens</li>
 </ul>
 
</div>



As El Salvador dives deeper into bitcoin, the country’s closely watched and controversial &#8220;volcano bonds&#8221; 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.”&nbsp;



“But the international context will tell us&#8230;I didn&#8217;t expect the war in Ukraine,&#8221; Zelaya <a href="https://www.reuters.com/technology/el-salvador-says-could-launch-bitcoin-sovereign-bond-between-march-15-20-2022-03-11/" target="_blank" rel="noreferrer noopener">reportedly said</a>.



Launching the bitcoin bond — dubbed the “<a href="https://cms.blockworks.co/el-salvador-plans-bitcoin-city-funded-by-bitcoin-bonds-and-powered-by-a-volcano/" target="_blank" rel="noreferrer noopener">volcano bond</a>” 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.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“These bonds started as a sovereign bond,” Marshik said. “Now, it is a securitized corporate bond, which [raises] the question of success.”</blockquote>



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 <a href="https://www.imf.org/en/News/Articles/2022/01/25/pr2213-el-salvador-imf-executive-board-concludes-2021-article-iv-consultation" target="_blank" rel="noreferrer noopener">statement</a> 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.”



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“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.”</blockquote>



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



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.



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Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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