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Monday, February 6, 2023

Fitch Ratings Downgrades El Salvador, Citing Bitcoin Risks

Fitch Ratings, one of the largest rating agencies in the U.S., has downgraded El Salvador’s long-term default rating deeper into junk status. They cite bitcoin adoption as a key reason for doing so. Fitch explained that the adoption of bitcoin as legal tender has added uncertainty about the possibility of an IMF program that will unlock financing in 2022-2023.

El Salvador Downgraded to Junk

El Salvador’s Long Term Foreign Currency Issuer Default Rating (IDR) was downgraded Wednesday by Fitch Ratings from “B-” to “CCC”. Among the Big Three rating agencies are Fitch Ratings, Moody’s, and S&P. Another two are Moody’s and Standard & Poor’s (S&P).

Bonds rated AAA, AA, A, or BBB are considered investment grades, while those rated BB, B, CCC, CC, C, or D are considered junk grades. The company explained that CCC ratings mean “Substantial credit risk” with “Very low margin for safety,” and that “default is very possible.”

The rating agency explained:

In Fitch’s view, the weakening of institutions and concentration of power in the presidency has increased policy uncertainty. The adoption of bitcoin as legal tender has further raised uncertainty over the potential for an IMF program to unlock financing for 2022-2023.

El Salvador’s rating was also lowered by Moody’s because of “heightened financing risks due to an increase in short-term debt” ahead of an $800 million bond payment due next January.

The government of El Salvador’s long-term foreign-currency issuer rating and senior unsecured rating were downgraded by Moody’s Investors Service from B3 to Caa1 in July. As a result, El Salvador’s “outlook remains negative,” the agency said, citing concerns over the country’s use of bitcoin as legal tender.

In September last year, El Salvador made bitcoin legal tender alongside the U.S. dollar. El Salvador’s government has purchased a total of 1,801 bitcoins since then.

El Salvador has been urged to drop using bitcoin as legal tender by the International Monetary Fund (IMF). The IMF also wants El Salvador to dissolve its fund used for currency conversion between bitcoin and dollars, as the costs of using bitcoin as a national currency would outweigh the benefits. El Salvador, however, rejected the IMF’s request to abandon bitcoin as legal tender.

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