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.

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