Shocker folks, it turns out El Salvador’s decision to make bitcoin legal tender wasn’t such a great idea after all.
This week, credit agency Fitch downgraded El Salvador’s debt rating from CCC to CC around 14 months after the company’s tech bro president and budding authoritarian, Nayib Bukele, made Bitcoin a nationally recognized legal currency. That credit ding, according to CoinDesk, stems partly from the country’s embrace of bitcoin which potentially limited El Salvador’s access to markets and, in turn, made it more difficult for the country to finance bond repayments.
In their report, Fitch said El Salvador’s, “tight fiscal and external liquidity positions and extremely constrained market access amid high fiscal financing needs,” made some sort of default “probable.” CC, for context, represents Fitch’s fourth worst credit rating and is seven ticks below the AAA gold standard.
Though the precise economic factors leading El Salvador to this point are varied, CoinDesk cites a January report from competing credit rating agency Moody’s, which said differences of opinion over bitcoin were harming the country’s ability to make a deal with the International Monetary Fund. That disagreement reportedly lowered the odds of the two making a deal needed to address an $800 million bond maturity looming in January 2023.
“The lack of IMF funding would significantly increase the risk for an adverse credit outcome,” Moody’s wrote according to Reuters. Moody’s also lowered El Salvador's credit rating last year, party in response to the country’s Bitcoin laws, which it claims“weakened governance in El Salvador,” and raised tensions with international partners.
Bukele signed El Salvador's so-called bitcoin law in June 2021 making it the first country in the world to recognize bitcoin as legal tender. That definition means Salvadorian retailers can list their prices in bitcoin and citizens can use it to pay their taxes. As Gizmodo previously noted, the bitcoin law’s also a potential boon for wealthy people looking to avoid capital gains taxes on their crypto earnings. In passing the law, Bukele argued bitcoin could improve the lives of an estimated 70% of Salvadorans who don’t have access to traditional financial services.
At the same time, only around 55% of Salvadorians had internet access in 2020 according to World Bank data, with an even smaller share likely owning crypto assets. Responding to that glaring accessibility gap, Bukele offered every citizen $30 in bitcoin as an incentive to download and register the government’s “Chivo” cryptocurrency app.
Over a year later it still doesn’t seem like average Salvadorians are rushing to embrace crypto. A March survey conducted by the Chamber of Commerce and Industry of El Salvador found a whopping 86% of businesses had never completed a transaction using bitcoin. Instead, over a thousand Salvadorians filled San Salvador streets last September to protest Bukele’s bitcoin law.
Regardless, Bukele’s still apparently going all in on bitcoin, with the leader even pressing forward on designs for an entire “bitcoin city” featuring a massive mining operation powered by volcanic geothermal energy. Early concept images of the city show a sprawling urban area caked in Trump gold with a central plaza that will look like, yeah you guess it, a bitcoin symbol.
Bukele’s remained committed to bitcoin even as its value continues to tumble in one of the largest and longest cryptocurrency downturns of all time. To put that into perspective, in June, the Salvadoran government’s total bitcoin holdings reportedly declined 57% in value from the same time a year prior. Where a normal leader would presumably cut their losses, Bukele instead bought the dip. The Salvadorian government reportedly purchased an additional 80 bitcoins over the summer.
“It’s clear President Bukele’s bullishness is not diminished by Bitcoin’s near 60% year-to-date decline,” 22V Research technical analyst John Roque wrote in a note seen by Bloomberg. “It won’t surprise us if he’s still bullish when bitcoin trades at our target of $10,000.”