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El Salvador Weekly: Bonds Bounce Back

In late July, a Morgan Stanley analyst told clients that they should buy El Salvador’s badly distressed bonds, which have repeatedly been cut deep into junk territory this year over fears of a default and the bitcoin-as-legal-tender experiment.

While it was hardly a stirring endorsement of the country’s financial conditions, Simon Waever, global head of emerging-market sovereign credit strategy at Morgan Stanley, said that at 28 cents on the dollar, the country was being “overly punished” in the market over fears of default.

He seems to have been onto something. As of Aug. 22, they were up to $0.37. So, up about a third in a month, which isn’t bad for a bond investment in a country with a whole lot of economic and social problems.

Beyond Bitcoin

And those social problems are growing. Last week, the Financial Times reported that President Nayib Bukele has ordered the construction of a 40,000-inmate “mega-prison” to house the tens of thousands of Salvadorans being arrested in his war on gang violence.

While the military-led crackdown has alarmed human rights groups — Amnesty International accused the administration of “massive” violations in June, it is hugely popular in the country, where Bukele’s approval rating is reportedly 86% in recent polls.

That goes a long way towards explaining why the bitcoin experiment that has been so widely condemned by financial organizations hasn’t really had much of an impact on his standing, despite its potential to worsen the country’s weak economy.

The International Monetary Fund has effectively refused to discuss a loan that was in the works before the nearly year-old law went into effect. That would have given it funds to pay off a Eurobond payment coming due at the beginning of 2023 that is the immediate cause of fears that the country will default on its debt.

That said, it’s not just the decision to make bitcoin a legal tender that has upset the bond rating agencies like Moody’s and Fitch’s that have downgraded Salvadoran debt several times in that year. The opacity with which the government has handled its bitcoin purchases. Information about them comes largely from the president’s Twitter account.

Bringing in Investment

Simon Dixon, CEO of FinTech BnkToTheFuture, met with Bukele on Aug. 19 to discuss what he said were plans to invest substantially in the country, according to Dixon’s Twitter account.

The Salvadoran ambassador to the U.S., Milena Mayorga, had previously said that BnkToTheFuture hopes to bring $6 billion in investments to the country, news site Be In Crypto reported.

“The company has presence in other places, but they are interested in operating in El Salvador because of the stability that the country offers,” Mayorga said. “When they have all the licenses they already have a law firm that is helping them with the registration of their company and hiring of personnel.”

Dixon, an active angel investor, was highly critical of the International Monetary Fund, saying that  a key to his investment plan is to avoid getting “caught up in the negativity and propaganda that feeds the narrative that favors the Monetary Fund.”

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