• Morgan Stanley believes that now is the time to buy El Salvadoran bonds

  • El Salvadoran notes, according to the banking behemoth, have been overly penalized in recent months due to constrained liquidity, and the government is still far from defaulting on its obligations.

    El Salvador-issued Eurobonds, according to Morgan Stanley, are a good buy at the moment, thanks in part to the recent crypto crisis, which has devalued the country’s bitcoin holdings. Despite its massive debt, the government could “muddl[ing] through” for at least a year without defaulting on bond payments, according to the investment bank.

    The Cost of Bad Scenarios

    The first government to use Bitcoin as legal cash has slipped into grave financial difficulties, likely during one of the worst bear markets in crypto history. El Salvador’s financial difficulty is reflected in falling bond prices, which can be linked in part to the country’s vulnerability to the principal cryptocurrency. For context, the country’s 2027 bond has fallen from 32 cents to 28 cents this year, reaching a record low of 26.3 cents last Friday.

    El Salvador’s President Nayib Bukele is under imminent pressure to raise $800 million for a bond payment due in January 2023. With its benchmark bonds due in 2032 yielding 24 percent, its bond values have declined in line with those of other troubled economies such as Ukraine, Argentina, and others.

    Morgan Stanley’s global head of emerging-market sovereign credit strategy, Simon Waever, is generally positive about El Salvador’s economic prospects, stating that the country is unlikely to default in the face of constrained global liquidity. Instead, he believes the 2027 bond should be priced at 43.7 cents on the dollar.

    “Markets are clearly pricing in a high probability of the autarky scenario in which El Salvador defaults, but there is no restructuring.”

    The generally poor stance on the country’s prognosis is purportedly tied to Bukele’s eruptive policy changes, which range from recognizing Bitcoin as legal cash to announcing the introduction of BTC bonds. Despite the recent increase in value, the asset’s value has dropped by more than half since El Salvador made its initial purchase in September of last year.

    The IMF was particularly dissatisfied with Bukele’s pro-crypto attitude, urging the country to reverse its decision and warning that it posed major dangers to financial stability.

    Bitcoin Bonds have been repeatedly delayed.

    El Salvador’s government announced plans to sell $1 billion in Bitcoin-backed bonds in November of last year in order to raise funds for the country’s struggling economy. The proceeds from the bonds will be used to support the much-touted “Bitcoin city,” as previously reported.

    Given the present unfavorable market conditions, the government has postponed the launch several times in recent months, fearing that Bitcoin’s extreme volatility might exacerbate the country’s fiscal crisis.

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