El Salvador’s ‘Volcano Bond’ could launch this week

  • So-called volcano bonds would be the first bitcoin-backed bonds issued by a country
  • The International Monetary Fund has urged El Salvador to remove bitcoin as legal tender, citing volatility and added risk to the country’s citizens

As El Salvador’s dive into bitcoin deepens, the country’s closely watched and controversial “volcanic bonds” could be launched as early as Tuesday.

Finance Minister Alejandro Zelaya told a local TV channel that “between March 15 and 20 is the right time”, adding that the country had “the tools almost finished”.

“But the international context will tell us… I didn’t expect war in Ukraine,” Zelaya reportedly said.

The launch of the bitcoin bond — dubbed the “volcanic bond” after the mining powerhouse, Conchagua Volcano — has become increasingly important due to the country’s poor lending outlook and rising debt, Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial, mentioned.

No details, regulatory framework or prospectus have been released regarding the bonds, Marshik pointed out, making it difficult to predict demand for supply.

“These bonds started out as a sovereign bond,” Marshik said. “Now it’s a securitized corporate bond, which [raises] the issue of success.

A loan from the International Monetary Fund (IMF), which has urged El Salvador to remove bitcoin’s status as legal tender, is unlikely, according to Marshik.

“The chances of an IMF loan are nil,” she said. “[El Salvador officials] walk around saying they have pension reform pending, and they will get a $590 million bond from the pension system.

Bitcoin poses significant risks to financial stability and consumer protection, IMF executive directors said in a January statement on El Salvador’s financial health.

“[Directors] emphasized that there are great risks associated with the use of bitcoin,” the statement read. “They urged authorities to reduce the scope of bitcoin law by removing the legal tender status of bitcoin.”

The IMF projects that El Salvador’s budget deficit will reach 5.75% of gross domestic product (GDP) in 2021 and around 5% of GDP in 2022. Public debt is also expected to rise to around 96% of GDP in 2026. Given the circumstances, the IMF believes that El Salvador is on an “unsustainable path”.

“The IMF projects a primary balance for 2022, but says debt is not sustainable under current policies,” Marshik said. “El Salvador needs a 3% GDP adjustmentto reduce the debt to a sustainable level.

Persistent budget deficits and high debt service lead to large and growing financing needs, the IMF report notes.

El Salvador has an $800 million bond maturing in January 2023. In July 2021, rating agency Moody’s downgraded the country’s debt rating to CAA1, putting it at risk of default.

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  • Casey Wagner


    Senior Reporter

    Casey Wagner is a New York-based business journalist who covers regulation, legislation, digital asset investment firms, market structure, central banks and governments, and CBDCs. Prior to joining Blockworks, she reported on markets at Bloomberg News. She graduated from the University of Virginia with a degree in media studies. Contact Casey via email at [email protected]

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