As crypto-Twitter cascaded doomsday memes about the bankruptcy of cryptocurrency exchange FTX and the steep drop in the price of bitcoin, one account remained particularly quiet on the subject.
Unlike previous crashes, El Salvador’s President Nayib Bukele, who made bitcoin legal tender a year ago, did not urge his followers to “buy the dip.” The laser eyes, popular among cryptocurrency traders, have long since been removed from his Twitter profile.
The day FTX declared insolvency, it announced that the country would sign a free trade agreement with China. Its vice president, Felix Ulloa, said China had offered to buy the country’s $21 billion in foreign debt as part of the deal.
The Central American country of 6.5 million people is in dire financial straits. In January, he must pay 667 million euros ($688 million) for amortization of the Eurobond. Earlier this year, Bukele promised that his country would issue bitcoin-denominated bonds to pay off the national debt and predicted that the price of bitcoin would reach $100,000.
But the so-called “volcanic bonds” never emerged and today the price of bitcoin is hovering around $16,000. The top tracker of the president’s opaque business estimate that he spent over $107 million on 2,381 bitcoins. Today, that investment is worth just over $40 million.
“If Bukele dreamed of being able to create a different and innovative political economy, against the advice of the IMF, that dream failed,” said Salvadoran economist Luis Membraño. “There are no easy alternatives, no shortcuts.”
The bitcoin losses are relatively insignificant compared to the overall debt, but the president’s determination to defy IMF advice to reverse his bitcoin policy has spooked international markets. When ratings agency Moody’s announced the country’s credit downgrade in January, Bukele tweeted, “Breaking: El Salvador DGAF,” an acronym for “don’t give a fuck.” Now Fitch says some form of default is likely in January.
With rising inflation, a looming recession and deteriorating fiscal situation, El Salvador cannot turn on the printing press because the country adopted the US dollar as its national currency in 2001. Instead, the government dipped into its reserves to cover its budgetary hole. If the situation deteriorates, the country could eventually be forced to abandon the dollar, according to Memberño.
However, accepting debt financing from China would mean a permanent break with the United States and bring the country closer to China, Russia and Turkey, Memberño said. “It would represent a total realignment of Salvadoran foreign policy,” he said.
That funding wouldn’t come cheap, according to Evan Ellis, senior associate at the Washington DC-based Center for Strategic & International Studies. “China is acting like a payday lender, they are making a lot of money from these deals,” he said. “But they often find a way to tie loans to long-term business and strategic benefits that pave the way for Chinese companies.”
Since El Salvador ended ties with Taiwan in 2018, China has agreed to build a stadium and library in the country, but plans to convert the port of La Unión into a logistics hub have stalled. .
Closer ties with China could also suit Bukele’s ambition. He has drawn criticism from the United States and Europe for seeking re-election in 2024 in violation of the country’s constitution.
“When populist governments, left or right, come to power, China acts like a non-judgmental underwriter,” Ellis said. “China can give Bukele the financial independence to be authoritarian and flout the constitution.”
With an approval rating of around 90%, Bukele remains Latin America’s most popular president, based on a tough law-and-order approach and regular attacks on the old political elite.
When Salvadorans elected him in 2019, after decades of corruption from mainstream parties and spiraling gang crime, many felt they were in the last-ditch saloon.
But as a bitcoin player, Bukele didn’t know when to hold them or when to bend them. Closer ties with China would represent yet another roll of the dice.
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