From Bitcoin to Bukele, El Salvador Debt Can’t Get a Break

For all the hype and hand-wringing around El Salvador’s Bitcoin experiment, traders axing holdings of the nation’s debt see bigger issues around the corner.

The nation’s dollar bonds due 2029 headed for their biggest loss in four months on Tuesday as debt investors looked beyond the glitchy -- but long awaited -- rollout of Bitcoin as legal tender and instead focused on an emerging political risk. A top court on Friday determined that a sitting president could run for a second term, potentially allowing the popular, unpredictable Nayib Bukele to seek reelection.

From Bitcoin to Bukele, El Salvador Debt Can’t Get a Break

Between the nation’s cryptocurrency experiment and the uncertainty of another potential term for Bukele, money managers are weighing the risk of a delayed deal with the International Monetary Fund -- especially after the millennial president thanked the lending authority on Twitter for the Bitcoin depreciation. 

“It’s purely political risk, which grew after the re-election news and hadn’t been priced in,” said Ramiro Blazquez, a strategist at BancTrust & Co., referring to the dip in bond prices. “It puts the IMF agreement further away and could intensify the diplomatic conflict with the U.S.”

From Bitcoin to Bukele, El Salvador Debt Can’t Get a Break

The bonds due in 2029 slumped almost 5 cents on Tuesday to 87.6 cents on the U.S. dollar, the biggest decline since early May, when Bukele’s party took control of the top court and replaced the attorney general. That move to consolidate power has also weighed on investors who see a deal with the IMF as necessary. El Salvador is seeking a $1.3 billion loan from the IMF, whose biggest voting member is the U.S. 

Read: Bukele Says El Salvador Bitcoin Wallet Can Now Be Downloaded

A spokesperson from the IMF didn’t immediately reply to a request for comment from Bloomberg News.

“The bottom line is that the dominant political agenda undermines U.S. diplomatic relations as well as prospects for an IMF program,” said Siobhan Morden, head of Latin America fixed-income strategy at Amherst Pierpont Securities. While the near-term default risks are low, “market risks could still be high until we better understand the Bukele policy risk premium, especially on how they plan to finance themselves next year.”

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