Morgan Stanley called El Salvador-issued Eurobonds at their current price levels a buying opportunity partly due to the recent crypto crash that has battered the value of the country’s bitcoin holdings. Despite its severe debt, the government could continue “muddl[ing] through” for at least a year without failing to meet its bond payments, said the investment bank.
Bad Scenarios Are Priced-in
Amidst potentially one of the worst bear markets in crypto history, the first country that took Bitcoin as its legal tender has fallen deep in financial distress. El Salvador’s financial distress is shown in the plummeted bond prices, partly attributed to its exposure to the primary cryptocurrency. For context – the country’s 2027 bond has slumped 32 cents on the dollar to 28 cents this year, touching a record low of 26.3 cents last Friday, noted Bloomberg.
The immediate stress ahead of El Salvador President Nayib Bukele is to come up with $800 million for a bond payment due in January 2023. With its benchmark bonds due in 2032 yielding 24%, its bond prices have fallen in line with other distressed economies such as Ukraine, Argentine, etc.
Simon Waever – the global head of emerging-market sovereign credit strategy at Morgan Stanley – holds a relatively optimistic view of El Salvador’s economic prospect, saying that the country is not likely to head towards default amidst tightened global liquidity. By his estimates, the 2027 bond should be priced at 43.7 cents on the dollar instead.
“Markets are clearly pricing in a high probability of the autarky scenario in which El Salvador defaults, but there is no restructuring.”
The generally negative sentiment shed on the country’s outlook is reportedly linked to Bukele’s eruptive change of policies, ranging from adopting Bitcoin as legal tender to announcing the launch of BTC bonds. Despite the asset’s recent uptick, its value has plunged over 50% since El Salvador made its first purchase in September last year.
The IMF was particularly unhappy with Bukele’s pro-crypto stance, urging the country to backtrack on its adoption and arguing that the move was imposing significant risks to financial stability.
Repeatedly Delayed Bitcoin Bonds
When the government of El Salvador announced the plan to issue $1 billion worth of Bitcoin-backed bonds in November last year, it aimed to bring in some cash for its struggled economy. The proceeds received from bonds will be directed towards backing the much-hyped “Bitcoin city,” as reported by CryptoPotato earlier.
Given the current bearish market condition, the government has postponed the launch multiple times over the past months since Bitcoin’s high volatility could potentially exacerbate the country’s debt issue.