Fitch downgrades El Salvador’s foreign-currency issuer default rating

International ratings agency Fitch Ratings downgraded El Salvador’s long-term issuer default rating in foreign currency from “CCC” to “CC”.

According to the document, one of the reasons for the country’s limited access to markets and bond repayment problems was recognition of the first cryptocurrency as legal tender.

«Policy disagreements related to the government’s adoption of Bitcoin reduced the likelihood of a timely deal with the IMF,» Fitch Ratings said.

The organization repeatedly criticized the government’s decision, and in Januaryrecommended removing Bitcoin’s status as legal tender. In 2021 El Salvador requested a loan from the IMF of $1.3 billion.

According to Fitch Ratings, by January 2023 the state would need around $3.7 billion with a financing gap of about $900 million. Experts noted that the situation “makes default to some extent likely”.

«Policy disagreements related to the government’s adoption of Bitcoin reduced the likelihood of a timely deal with the IMF,» Fitch Ratings said.

The authorities began buying Bitcoin for the first time in September 2021, creating a dedicated fund of $150 million. By the end of the month El Salvador additionally purchased 150 BTC, bringing the total reserves to 700 BTC.

In November another 100 BTC were bought, in January 2021 — additional 410 BTC during a market dip. In May 2022 Bukele announced purchases of 500 BTC.

As of writing, El Salvador holds 2381 BTC in the state fund worth $47.2 million, according to Buy Bitcoin Worldwide.

In June, amid the decline in the price of the first cryptocurrency below $23,000, the country’s “paper” loss on the 2301 BTC in reserves exceeded $46.1 million.

Earlier Moody’s downgraded El Salvador’s long-term foreign-currency rating to Caa1 with a negative outlook. In early 2022, the firm’s analysts noted that purchases of Bitcoin exert further pressure on the country’s creditworthiness.

As reported, the head of El Salvador’s central bank, Carlos Acevedo, said that the legalization of the first cryptocurrency “killed” relations with the IMF.

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