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Fitch Ratings Downgrades El Salvador Deeper Into Junk Status Citing Bitcoin Risks

Fitch Ratings Downgrades El Salvador Deeper Into Junk Status Citing Bitcoin Risks

Fitch Ratings, one of the most powerful U.S. rating agencies, has downgraded El Salvador’s long-term default rating further into junk status. They cited risks associated with adopting bitcoin legal tender as a reason. “The adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023,” Fitch detailed.


El Salvador downgraded to Junk

Fitch Ratings has downgraded El Salvador’s Long Term Foreign Currency Issuance Default Rating (IDR), from “B” to “CCC” Wednesday. American credit rating agency Moody’s is one of the Big Three credit ratings agencies. Moody’s and Standard & Poor’s are the other two.

Bonds rated AAA, A, BBB, or A are investment-grade bonds. Bonds rated BB or B, CCC or CC are speculative or junk-grade bonds. The company explained that CCC ratings mean “Substantial credit risk” with “Very low margin for safety,” and that “Default is a real possibility.”

The rating agency explained

In Fitch’s view, weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023.

The rating agency also said that “heightened financing risks stemming from increased reliance on short-term debt” ahead of an $800 million global bond payment due next January influenced its decision to cut El Salvador’s rating.

In July, Moody’s Investors Service downgraded El Salvador’s long term foreign-currency-issuer rating and senior unsecured rating from B3 to CAA1. According to the agency, El Salvador’s outlook remains negative due to concerns about bitcoin being used in its legal tender.

El Salvador made bitcoin legal tender in September 2013. Since then, the government of El Salvador has bought 1,801 bitcoins.

The International Monetary Fund (IMF), recently asked El Salvador to stop using bitcoin as a legal tender. The IMF also wants El Salvador to dissolve its fund used for conversion between bitcoin and dollars, noting the costs of adopting bitcoin as a national currency exceed the benefits. El Salvador, however, rejected the IMF’s call to abandon bitcoin as legal tender.

What do you think about Fitch Ratings downgrading El Salvador deeper into junk due to bitcoin risks? Comment below.

Kevin Helms

A student of Austrian Economics, Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests include Bitcoin security, open source systems, network effects, and the intersection of cryptography and economics.

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