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El Salvador’s ‘bitcoin bonds’ plan gets wary reception from fund managers

Bond investors have taken a dim view of El Salvador’s plans to infringe $1bn to fund a volcano-powered “bitcoin city”, saying the scheme could push the country remoter from wangle to traditional debt markets.

President Nayib Bukele, who in September made bitcoin legal tender in the inside American country, said on Sunday that half the proceeds would be used to buy the cryptocurrency with the rest going towards infrastructure and bitcoin mining.

Emerging markets fund managers expressed little interest in ownership the new bonds, which El Salvador plans to issue next year with an yearly coupon of 6.5 per cent. That is far unelevated the prevailing interest rate on the country’s existing overseas bonds, which have seen yields screw higher this year as investors balk at the increasingly unorthodox direction of Bukele’s economic policy.

“Why would you lend them money at this level when it’s a distressed credit?” said Kevin Daly, a fund manager at Aberdeen Standard Investments. “They are shut out of the [conventional] yoke market so they can’t finance themselves that way. I don’t know who is going to buy these immuration but it sure as heck isn’t going to be us.”

The sell-off in Salvadoran debt unfurled on Monday, pushing the yield on a yoke maturing in 2032 whilom 13 per cent. The country has 10 international dollar immuration worth $7.65bn, roughly 30 per cent of its gross domestic product and well-nigh a third of its overall government debt.

Its next debt repayment is a $800m yoke maturing in January 2023. That yoke currently trades at a price of less than 84 cents on the dollar — and a yield of nearly 25 per cent — indicating considerable uneasiness well-nigh El Salvador’s worthiness to make the payment.

The new “bitcoin bonds”, which will be sold in $100 tranches in a deal to be serried by crypto mart Bitfinex, may find a increasingly receptive regulars among small investors and crypto enthusiasts.

“This yoke offering is something we think will be lulu to a wide range of investors ranging from cryptocurrency investors, investors seeking yield, ‘hodlers’, and ordinary people,” said Samson Mow, senior strategy officer of blockchain technology visitor Blockstream, which has been recommending Bukele’s government on the plans. “We believe this yoke has the potential to slide hyperbitcoinisation and bring well-nigh a new financial system built on top of bitcoin.”

Holders of the yoke would earn “special dividends” generated by “staggered liquidation” of El Salvador’s bitcoin holdings, Mow said.

One person working on the yoke issuance said many would-be investors’ motives are not purely financial. “There is a desire to be part of something so groundbreaking,” the person said.

“Sentiment is positive considering there is once a lot of wanted in the digital token space. In fact, far less compelling projects have attracted increasingly interest,” the person added.

But holders of El Salvador’s existing immuration worry that the scheme is unlikely to modernize the country’s overall creditworthiness, particularly if its success persuades Bukele’s government it can mend its finances with the support of the IMF. Negotiations with the fund have been dragging on all year with little prospect of a breakthrough, analysts say.

“I wouldn’t be surprised if they managed to raise the money,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management. “But potentially the bitcoin immuration make the probability of an IMF programme plane lower considering they say we’ve managed to find a new source of financing.”

El Salvador had little prospect of regaining wangle to yoke markets without at least the potential of future IMF support, de Sousa said, subtracting that without market wangle it would struggle to repay its 2023 bond.

Its relations with the US hit a remoter low on Monday when Washington’s interim chargé d’affaires in El Salvador, Jean Manes, said she would leave the country.

“We’re hitting pause considering the government of El Salvador isn’t showing any interest in improving the relationship,” she said in a local news interview.

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