Bitcoin makes IMF hesitant to issue new loans to El Salvador

IMF Communications Director Julie Kozack reiterated today that “addressing risks arising from Bitcoin is a key element of these discussions” in reference to negotiations between El Salvador and the IMF regarding a loan program.

El Salvador is still heavily indebted, and Bitcoin is not helping the country refinance its debts with the International Monetary Fund (IMF). According to the IMF, its member countries should not grant crypto assets official currency or legal tender status. 

El Salvador did not follow those instructions.

Read more: El Salvador Bitcoin agency reportedly made $235 this year, $7M off target

As of June 30, the country owed a relatively manageable $188 million (143.6 milion SDRs valued at $1.31534 apiece) in outstanding debt to the IMF.

Although the figure is relatively small for a sovereign nation, credibility with the IMF is critical to El Salvador for its refinancing of existing debts.

Even for non-IMF loans, the IMF is critical

Indeed, El Salvador is perennially refinancing billions of dollars in various types of debt from lenders who use IMF’s praises or admonishments as a bellwether similar to S&P sovereign creditworthiness ratings.

Earlier this year, its congress issued another $1.5 billion, for example. Like all US dollar-pegged countries, because El Salvador cannot print US currency to repay its debts, it must raise true loans and pass creditworthiness checks. In sovereign debt markets, the IMF is a critical ally for even non-IMF lenders to grant credit facilities at favorable rates.

Unfortunately, the IMF is vocally skeptical of bitcoin’s role in nation-state dealings. After all, the price of bitcoin regularly fluctuates by high single-digit percentages on an intraday basis, suffers flash crashes, and experiences drawdowns in excess of 70% every few years.

In June 2011, the price of bitcoin crashed 99% within one day. In December 2017, it crashed 80%. Even as recently as March 12, 2020, bitcoin crashed 40% in a single day.

According to the IMF, El Salvador was making progress as of August to “mitigate potential fiscal and financial stability risks from the Bitcoin project.” However, its statements today indicate that Salvadoran President Nayib Bukele has not yet satisfied the IMF’s requests at the negotiation table.

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