El Salvador - Bukele’s Bitcoin purchases in the face of possible default is risky behavior
But the big picture is more nuanced than it might seem
A NY Times story published on 5 July cast Nayib Bukele as a bit of a joke president when judged on his Bitcoin policy. The Times wrote about how instead of attempting to steer the country’s resources toward paying off a significant sovereign debt payment by January 2023, the president was gambling public funds on Bitcoin.
Of course, this drew ire from some of Bukele’s investors. COWA Mining’s Josue Lopez is one of them. He slammed the Times for failing to report the facts and for failing to ask regular Salvadorans what they think (even though the story clearly reports out local voices if you read it). Lopez’ firm is setting up a $200 million solar facility for Bitcoin mining in Chalatenango and a series of hydro projects with the state’s energy firm. It’s somewhat understandable one would grow angsty for ignoring the mining side of the story. There’s no mention of LaGEO, COWA, or any other long-term, private Bitcoin mining initiatives in the Times story.
But let’s back up, because this story isn’t about mining. Bukele bought some Bitcoin. So what does that mean for the country’s treasury? First, Bukele’s government has an obligation to pay creditors $800 million in January 2023. Government finances are strained and this is the most important thing for Bukele’s economy right now: avoiding default. What bond people are concerned by is the fact that Bukele used unchecked executive power to spend $107 million on a series of Bitcoin purchases since the Bitcoin Law went into effect in September 2021. The value of those bitcoin purchases has fallen by more than 50% to $48 million.
So, Bukele gambled 12.5% of his January payment to creditors, spent some of the winnings on a $4 million veterinary hospital, and then lost half of it. He also sold the world (mainly Bitcoiners) on a terrific $1 billion volcano bond that would go toward powering a fresh, new city. All of this, it was understood, would materialize suddenly and the raw foreign investment would take care of the country’s damaged finances. Again, the volcano bond has been severely delayed. There is still no term sheet.
Is this what prudent spending of tax-payer money looks like? It seems that international bond investors think not. They see increased risk of default on the January 2023 debt because of how Bukele’s administration is managing his country’s finances. A default would severely damage the country’s credit and make future borrowing more expensive.
London-based crypto economist and researcher Frank Muci thinks Bukele has alternative options that he has not yet exhausted, however. If Muci is right in his analysis, then the Bitcoin funds mismanagement is over-hyped. Bukele can turn to the IMF for a big loan with cheap financing to get through the short term. If he doesn’t want to sign up for the IMF’s strict conditions on that loan, he can use Special Drawing Rights with the same institution. Muci describes options with other credit facilities too: regional development banks CAF, CABEI and the IDB.
There are other possibilities as well. Bukele could order state energy company CEL to privatize key energy assets. With Bitcoin mining production cost at $13,000, Bitcoiners are smart to be interested in the country’s hydro and geothermal assets. There are private equity players who could conceivably go into the country in partnership with a miner much like some private equity groups take stakes in oil concessions.
OK, sure. So, Bukele might not default. But let’s remember that investors like sturdy economies with governments that stick to careful economic policy. Bukele could have easily set up a jurisdiction for Bitcoin-related investment opportunities like COWA’s mining project without touching BTC with public money.
But he did. And now he’s down big. And that is an indisputable fact. It is this miscalculation that has creditors wondering the obvious: might Mr. Bukele mis-calculate again?