The government of El Salvador gets a lower credit rating from Moody’s Investors Service. The lowering of the score is due to uncertainties about the prospect of new funding from the International Monetary Fund. Due to the country adopting bitcoin as legal money.
El Salvador’s legislative assembly adopted the world’s first bill making bitcoin legal tender in the country on June 9. Therefore, making both the US dollar and bitcoin legal cash.
El Salvador Credit Down To Caa1
According to reports, the Central American country is negotiating with the IMF over a roughly $1 billion loan deal. Meanwhile, the IMF issued a warning to its members that the dangers of making cryptocurrencies legal tender exceed the advantages.
According to a new IMF blog, crypto assets, including bitcoin, pose significant risks as a national currency. Risks include macro-financial instability, financial integrity, consumer protection, and the environment as a national currency.
El Salvador’s long-term foreign-currency issuer and senior unsecured ratings were downgraded to Caa1 by Moody’s on Thursday. Therefore they maintained a negative outlook.
IMF’s Statement
The IMF stated:
“The negative outlook on the Caa1 rating reflects Moody’s view that the fiscal position remains vulnerable and susceptible to financing shocks that could jeopardise the sovereign’s repayment capacity ahead of the challenging redemption schedule on its external market debt beginning in January 2023.”
“Despite the authorities’ willingness to enact measures to achieve further, gradual fiscal consolidation. The sovereign will continue to face liquidity pressures in future years due to limited availability of funding alternatives for the sovereign and uncertainty surrounding the possibility of fresh financing from the IMF.”
Moody’s Concerns
Moody’s has included potential funding flows from the IMF programme to analyse El Salvador’s funding prospects for 2022. However, the rating agency believes that even if an agreement on a financing programme is reached with the IMF, issues involving the sovereign’s high cost of funding are unlikely to be fully addressed by official funding flows.
