Bukele’s Bitcoin Trading Increases El Salvador’s State Credit Risk: Moody’s

Bukele's Bitcoin Trading Increases El Salvador's State Credit Risk: Moody's

El Salvador’s historic acceptance of Bitcoin (BTC) could have a negative impact on the country’s creditworthiness, according to Moody’s Investors Service.

Moody’s analyst Jaime Reusche told Bloomberg this week that El Salvador’s bitcoin gambit “certainly adds to the risk portfolio” of a country that has struggled with liquidity problems in the past.

Led by President Nayib Bukele, El Salvador recognized bitcoin as legal tender and issued a state-owned crypto wallet to facilitate payments, remittances, and ownership. Along the way, El Salvador has amassed a treasure trove of 1,391 BTC, with President Bukele famously “buying the dip” on multiple occasions, using Bitcoin’s volatility to bolster his country’s holdings.

However, Reusche warned that accumulating more BTC would increase El Salvador’s risk of default. “If it gets much higher, that poses even greater risk to the issuer’s ability to repay and its tax profile,” he said.

In addition to downgrading El Salvador’s credit rating, Moody’s has warned that the country’s so-called Bitcoin Volcano bond could limit its access to foreign bond markets. Proceeds from the volcano bond, which is expected to raise around $1 billion, will be used to fund El Salvador’s Bitcoin City project.

Related: Tonga Copies El Salvador’s Bill Making Bitcoin Legal Tender, Former MP Says

Attacks on El Salvador’s Bitcoin Gambit by legacy financial institutions are nothing new. In November 2021, the Washington-based International Monetary Fund warned El Salvador against using Bitcoin as legal tender. Meanwhile, the World Bank has rejected the country’s request for help implementing its Bitcoin Law over alleged environmental and transparency concerns.

Still, El Salvador has remained steadfast in adopting Bitcoin and creating an attractive environment for crypto investors and entrepreneurs. Last week Finance Minister Alejandro Zelaya said the country’s bitcoin law has already attracted foreign investment.