'Bitcoin Chaos Spreads' US-El Salvador Sovereign Bond Yield Gap Widens to Record High

El Salvador citizens protested on the 15th (local time) in the capital San Salvador, shouting against the use of Bitcoin and opposing President Nayib Bukele's re-election.
[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The financial market of El Salvador, the first country in the world to adopt Bitcoin as legal tender, has plunged into severe turmoil.

Major foreign media reported on the 16th (local time) that the spread between El Salvador government bonds and U.S. Treasury bonds has widened to an all-time high. On that day, the yield spread between El Salvador government bonds and U.S. Treasury bonds reached 986 basis points (1bp = 0.01 percentage points), surpassing the previous record set in May last year. The widening spread between U.S. Treasury bonds, considered the safest financial instruments, and El Salvador bonds indicates that the risk of El Salvador bonds has increased significantly.

Credit rating agency S&P stated on the same day that the risks outweigh the benefits of El Salvador adopting Bitcoin as legal tender, and gave a negative outlook on El Salvador’s credit rating. S&P particularly pointed out that a significant risk is that it could become an obstacle to receiving financial support from the International Monetary Fund (IMF). If El Salvador fails to receive funding from the IMF, fiscal risks will increase and banks could suffer major damage due to exchange rate issues, it added.

S&P currently rates El Salvador’s sovereign credit rating as 'B-' with a stable outlook. Moody’s downgraded El Salvador’s credit rating from 'B3' to 'Caa1' at the end of July. B3 corresponds to S&P’s B-, while Caa1 is one notch lower. Moody’s has also warned of the possibility of further downgrades.

IMF spokesperson Gerry Rice said on the same day that discussions are ongoing regarding support for El Salvador, with anti-corruption measures and fiscal capacity being key topics. According to foreign media, the IMF did not respond to whether the S&P evaluation released that day would affect the discussions on support for El Salvador.

President Nayib Bukele’s series of political moves have also had a negative impact on El Salvador’s financial market. After dismissing constitutional court judges and the attorney general in May, he amended the law to allow presidential re-election, paving the way for him to run again in the 2024 presidential election. This has led to analyses that relations with the U.S. have further deteriorated. Since the U.S. exerts the greatest influence on IMF decisions, the possibility of El Salvador receiving financial support from the IMF has become even lower.

El Salvador officially began using Bitcoin as legal tender on the 7th, the first country in the world to do so. Despite opposition from the majority of the population, President Bukele pushed forward with the Bitcoin adoption, and protests condemning the government have been held daily in El Salvador recently.

This content was produced with the assistance of AI translation services.