Why Bukele from El Salvador is doubling down on Bitcoin

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The cryptocurrency crisis, compounded by the dramatic collapse of fast-growing crypto exchange FTX in mid-November, has raised questions about the future of these digital currencies. Bitcoin, the largest and most well-known of them, has fallen to its lowest level in two years in recent days. But one of the biggest backers of cryptocurrency is doubling down.

On November 17, Salvadoran President Nayib Bukele, who last year made his country the first in the world to adopt Bitcoin as legal tender, responded to the crypto slide by promising that the government would buy one Bitcoin every day from the market. ‘coming. On November 22, Bukele’s administration sent a bill to El Salvador’s Congress that would allow it to sell $1 billion in so-called “volcanic bonds” – a public debt, denominated in US dollars and paying 6 .5% interest per annum to bondholders – in order to buy even more cryptocurrency and build a coastal “Bitcoin City”.

It can be hard to understand why Bukele remains so enthusiastic about a policy that has been, by almost every measure, a disaster. Bukele’s attempt to get Salvadorans to use the notoriously volatile cryptocurrency has left the country looking like a much riskier place to invest. This policy blocked El Salvador’s negotiations with the International Monetary Fund (IMF) for a loan of 1.3 billion dollars, needed to fill large gaps in its public finances. Bukele’s government is courting other sources of cash, announcing new trade talks with China on November 9. But few economists believe Salvadoran Vice President Felix Ulloa’s assertion that China is ready to help El Salvador with the record $21 billion debt burden it owes foreign lenders. If it does not find new creditors to help service this debt, El Salvador runs the risk of defaulting early next year.

Although Bukele declined to disclose how much taxpayer money he spent on Bitcoin, the best estimate, based on his buy announcements, is $107 million, with an additional $200 million for administration and maintenance. infrastructure, which equates to almost 4% of the developing country’s budget in 2023. El Salvador’s bitcoin holdings are now worth less than $40 million.

To top it off, Salvadorans just aren’t that interested in bitcoin: an in-person survey of 1,269 residents published by the University of Central America José Simeón Cañas (UCA) in October found that fewer a quarter of respondents had used cryptocurrency in 2022. Only 17% said the Bitcoin rollout was a success, while 66% said it was a failure. And 77% want Bukele to stop using public funds to buy Bitcoin.

A government employee is seen at an ATM of the public electronic wallet Chivo in San Salvador, November 17, 2022.

Marvin RecinosAFP/Getty Images

And yet, Bukele’s bitcoin politics haven’t hurt his approval rating, which has remained above 85% since he took office in 2019. In fact, the cryptocurrency arguably gives the president exactly what he wants. ‘he wants. On the global stage, Bitcoin has diverted media attention from El Salvador’s longstanding problem with gang violence and the authoritarian measures Bukele has taken to deal with it, including mass arrests, ousting of judges of the Supreme Court who oppose his agenda and the launch of an unconstitutional bid for re-election in 2024. At home, Bitcoin is a key part of the narrative that Bukele is pushing, both of El Salvador – as a rejuvenated and innovative country , offering new opportunities to young Salvadorans – and of his presidency. He does not portray himself as a classic strongman, but as a provocative young visionary challenging the Western financial elite.

That means Bukele has little incentive to ditch Bitcoin, despite mounting losses for his country, says Tiziano Breda, Central America analyst at Crisis Group. “It’s Bukele’s ultimate [goal] to rename the country,” he said. “And he doesn’t seem like a person who can admit failure. He will go to the last consequences of this experience.

More from TIME Why Salvadorans Don’t Care About Bitcoin

Most credit the president’s sweeping crackdown on gang violence with his sky-high approval ratings. Bukele oversaw the arrest of over 50,000 suspected gang members and a dramatic drop in the murder rate in El Salvador. Watchdogs say this has come at the cost of “eviscerating human rights” for both gang members and innocent Salvadorans caught in the crossfire. But the reaction from civil society has been relatively weak, Breda says, with Bukele successfully dismissing protest groups and critical media as puppets for the two establishment parties that ruled El Salvador for three decades before him.

Although most Salvadorans dislike bitcoin, they view the policy more as an eccentricity of Bukele than a serious threat to economic security, says Ricardo Castaneda, a San Salvador-based economist at the Central American Institute for tax. Growing concern about public finances has yet to translate into serious economic hardship, he says: the government has shielded people from the worst of global inflation by subsidizing gasoline prices. And remittances from the United States, which account for 26.7% of El Salvador’s GDP, have not slowed.

Soldiers listen to Salvadoran President Nayib Bukele address them near a military barracks on the outskirts of San Juan Opico, west of San Salvador, November 23, 2022.

Marvin RecinosAFP/Getty Images

Bukele, meanwhile, insists that Bitcoin is the long-term solution to El Salvador’s economic problems. Like most crypto enthusiasts, he says the price will soon go up and will eventually generate huge profits in El Salvador. Meanwhile, the president’s Twitter account shows an endless stream of retweets from foreign crypto influencers: they celebrate El Salvador’s coffee and beaches, and share stories of Salvadorans who left their country decades ago and now. , apparently thanks to Bitcoin, have decided to surrender.

A looming credit crisis

There are clouds on the horizon for Bukele’s Bitcoin dream, however. El Salvador must find a way to pay about $667 million in bonds maturing in January 2023 and another $1 billion in 2025. The government has announced its intention to buy back part of this debt using the reserves of its central bank, hoping to inspire enough confidence in the market to allow it to sell new bonds. Analysts say such measures could help El Salvador avoid default next year. But with dwindling cash reserves and unsustainable levels of debt to repay, the risk will remain.

If Bukele does not find buyers for his “volcanic bonds” or another way to fill the fiscal hole, he could be forced to resume negotiations with the IMF. The lender would likely grant a loan on the condition that Bukele remove Bitcoin as legal tender and introduce stricter regulations on the use of cryptocurrencies, to reduce the risk of criminal groups using El Salvador to launder money. .

Bukele will only agree to those terms when the economy begins to struggle enough for Salvadorans to feel it, according to Castaneda. “There’s already a little crack there,” he says, noting that 58% of respondents to October’s UCA poll identified El Salvador’s biggest problem as the economy – a spike of 15%. from May and the highest proportion in the last decade. (The drop in concerns about crime probably helped). “If things don’t get better, this crack will get bigger and bigger and then the applause will turn into boos.”

Until then, Bukele will likely continue to roll the dice on Bitcoin. “He’s like a player in a casino who loses,” Castaneda says. “Instead of walking away or being more cautious, they’re doing everything they can.”

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Write to Ciara Nugent at [email protected].

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