Moody’s downgrades El Salvador’s rating amid bitcoin legalization

The international rating agency Moody’s downgraded El Salvador’s long-term foreign-currency credit rating to Caa1 with a “negative” outlook.

The agency cited “deterioration in the quality of policy-making” and a “vulnerable fiscal position” of El Salvador. In analysts’ view, government actions threaten the country’s ability to service external debt.

Among other measures, Moody’s highlighted the Nayib Bukele administration’s legalization of bitcoin. Analysts argue that this step, taken together with other factors, could impede reaching an agreement with the International Monetary Fund (IMF). El Salvador is counting on about $1 billion in financial assistance from the latter.

In June, El Salvador’s Legislative Assembly passed a law recognizing the first cryptocurrency as an official means of payment in the country. It will take effect on September 7, 2021.

To implement bitcoin in the country, the government sought technical assistance from the World Bank, but the organization refused to provide assistance.

In the same month, IMF official Gerry Rice said that this initiative could entail a range of risks and regulatory issues. He also noted that, when dealing with crypto-assets, an effective supervisory policy plays a crucial role.

In July the IMF warned of the consequences of bitcoin legalization. The organization believes that countries adopting digital assets as national currencies or legal tender risk macroeconomic stability.

Earlier, Steve Hanke, a professor of applied economics at Johns Hopkins University, stated that the new law could completely wreck El Salvador’s economy, as it would lead to outflows of U.S. dollars abroad.

Experts interviewed by ForkLog say the initiative could just as likely attract investment as prompt capital flight.

JPMorgan analysts have described liquidity, volatility, and the risk of conversion to the U.S. dollar as the main constraints on the use of digital gold in El Salvador.

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