Fitch Downgrades El Salvador to CCC Weeks Before Bitcoin Bond Issue

Ratings agency Fitch has downgraded El Salvador’s long-term foreign currency issuer default rating (IDR) to CCC from B- weeks before the country starts issuing its bitcoin bond.

• The downgrade reflects “heightened risk stemming from increased reliance on short-term debt, limited scope for additional local market financing, uncertain access to additional multilateral funding and external market financing given high borrowing costs,” Fitch said in a report on Wednesday.
• The Central American nation faces close to $1.2 billion in external debt amortizations in 2023, with $800 million due in January, Fitch noted. Fitch also said that the country faces a financing gap of $1.2 billion in 2022, which will rise to $2.5 billion in 2023.
• “There is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubts surrounding an IMF program, as well as the capacity to issue bitcoin-backed bonds," the rating agency said, referring to the International Monetary Fund.
• El Salvador’s bitcoin-denominated Volcano Bonds offer a 6.5% coupon, compared with the 13% benchmark 10-year yield on El Salvador’s outstanding government bonds.
• Analysts previously told CoinDesk that the bonds are effectively a giant long on bitcoin rather than an expression of confidence in the financial prudence of President Nayib Bukele’s government.
• “Anyone buying this bitcoin-backed bond is betting on the cryptocurrency in a very big way, ignoring the credit market currently signaling that El Salvador is very much facing a distressed-debt situation,” Marc Ostwald, chief economist and global strategist at ADM Investor Services International (ADMISI), previously told CoinDesk.
• At the same time, proponents of the bond program, such as Samson Mow, the founder of Blockstream, the company that developed the bond, said that bitcoin is a way to disintermediate the sovereign debt market and give El Salvador access to cheaper capital.
• El Salvador’s bitcoin bond program is expected to be implemented by March 15, according to its finance minister.
• Moody’s lowered the country’s foreign-currency issuer and senior unsecured ratings to Caa1 from B3 last July, citing El Salvador’s adoption of bitcoin as legal tender.
• Bukele had previously tweeted, colorfully, that he doesn't care about the opinions of ratings agencies, renaming the country 'El Hodlador' in a meme.

CORRECTED (Feb. 10, 6:55 UTC): Corrects second bullet to say "Central American" nation not "South American."