Moody’s criticises Salvadoran government’s bitcoin purchases

Salvadoran government’s bitcoin operations are contributing to the country’s already weak credit rating and signal a rising likelihood of default. Moody’s analyst Jaime Reusche said in an interview with Bloomberg.

He noted that the fact that the government holds part of its assets in the first cryptocurrency “definitely adds risk to the portfolio.” He stressed that operations with digital assets pose a threat, especially for a state that “in the past faced liquidity difficulties.”

The Salvadoran Bitcoin Fund holds 1,241 BTC. Reusche stressed that the scale of government investment is not large enough to deprive it of the ability to meet its obligations. However, in his view, the risk of such a threat would rise if President Nayib Bukele does not adjust its monetary policy.

“If the fund’s size grows much larger, it would pose an even greater risk to the issuer’s solvency and fiscal profile,” Reusche said.

Moody’s also noted that the high yield (over 35%) Bitcoin bonds, issued in November last year, have closed the government’s access to foreign markets, and the absence of an agreement with the International Monetary Fund raises the risk of default in the country.

In August 2021, Moody’s downgraded El Salvador’s long-term foreign-currency debt rating to Caa1 with a ‘negative’ outlook.

Back in September 2021, El Salvador the law recognizing Bitcoin as an official means of payment alongside the US dollar came into force.

In the same month the government bought 700 BTC through a specially created fund.

In October authorities increased reserves in Bitcoin by a further 420 BTC, and in the following month purchased an additional 100 BTC.

In December El Salvador bought 21 BTC. According to President Bukele, the country invested in Bitcoin to celebrate “the last 21 days of the 21st century”.

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