El Salvador’s Adoption of Bitcoin Has Negative Implications for Rating: S&P Global

A representation of virtual currency bitcoin and small toy figures are placed on a computer motherboard in this illustration taken on Jan. 7, 2021. Dado Ruvic/Reuters

S&P Global Ratings has warned that El Salvador’s adoption of bitcoin as legal tender is burdened by risk and will have a negative impact the country’s credit rating.

“The risks associated with the adoption of bitcoin as legal tender in El Salvador seem to outweigh its potential benefits. There are immediate negative implications for credit, and wide usage of bitcoin is unlikely,” S&P Global wrote in a tweet Friday.

The largest of the Big Three rating agencies, S&P currently rates El Salvador at B- with a “stable” outlook.

Competitor Moody’s downgraded the Central American country’s rating to Caa1 in July, in part due to uncertainty around the International Monetary Fund’s (IMF) provision of a fresh round of financing to El Salvador after it adopted bitcoin as a legal currency, alongside the U.S. dollar.

“The negative outlook on the Caa1 rating reflects Moody’s view that the fiscal position remains vulnerable and susceptible to financing shocks that could jeopardize the sovereign’s repayment capacity ahead of the challenging redemption schedule on its external market debt beginning in January 2023,” Moody’s said.

“Limited availability of funding alternatives for the sovereign and uncertainty surrounding the possibility of fresh financing from the IMF suggest that the sovereign will continue to face liquidity pressures in future years despite the authorities’ willingness to enact measures to achieve further, gradual fiscal consolidation,” the agency added.

The potential for an IMF program for El Salvador is “under discussion,” IMF spokesman Gerry Rice said at a news briefing on Thursday, adding that anti-corruption measures and fiscal responsibility are high on the agenda.

Earlier this month, El Salvador became the first country in the world to adopt bitcoin as legal tender, with the country’s President Nayib Bukele a major advocate of the move.

“The process of #Bitcoin in El Salvador has a learning curve. Every step toward the future is like this, and we will not achieve everything in a day, nor in a month. But we must break the paradigms of the past,” Bukele wrote on Twitter on Sept. 7, the day the law making bitcoin legal tender went into effect.

View of a store that accepts Bitcoin in San Salvador, El Salvador, on Sept. 1, 2021. Marvin Recinos/AFP/Getty Images

El Salvador’s experiment of making bitcoin legal tender was marred on the day of adoption by minor technical glitches hampering its use, while street protests by mistrustful citizens broke out in the country.

The IMF, which provided an emergency loan to El Salvador last year and is negotiating another round of lending, has expressed reluctance around the country’s adoption of bitcoin as legal tender.

“The most direct cost of widespread adoption of a crypto asset such as bitcoin is to macroeconomic stability,” the IMF said in a blog post in late July. “As national currency, crypto assets—including bitcoin—come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment.”

While the IMF praised the consideration of underlying technologies for the potential advantages they provide, such as around boosting financial inclusion, the agency urged caution.

“Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut,” the IMF said.