As a crypto twitter with apocalyptic memes about the cascaded Bankruptcy of cryptocurrency exchange FTX and the sharp drop in bitcoin price, one account has been particularly silent on the subject.
Unlike previous crashes, El Salvador President Nayib Bukele who made bitcoin legal tender a year ago, didn’t exhort his followers to “buy the dip.” That laser eyespopular with cryptocurrency traders, have long since been removed from his Twitter profile.
On the day FTX filed for bankruptcy, he announced that the country would co-sign a free trade agreement China. Vice President Félix Ulloa said China had offered to buy the country’s $21 billion in foreign debt as part of the deal.
The Central American country with 6.5 million inhabitants is in a difficult financial situation. In January it will have to pay 667 million euros ($688 million) for a Eurobond amortization. Earlier this year, Bukele pledged that his country would issue bitcoin-denominated bonds to pay down the national debt and predicted that the price of bitcoin would hit $100,000.
But the so-called “volcanic bonds” never showed up and today the bitcoin price is hovering around $16,000. That best tracker the president’s opaque trade estimate that he spent over $107 million on 2,381 bitcoin. Today that investment is worth just over $40 million.
“If Bukele dreamed of creating a different and innovative political economy against the advice of the IMF, that dream has failed,” said Luis Membraño, a Salvadoran economist. “There are no easy alternatives, no shortcuts.”
Bitcoin losses are relatively insignificant for overall debt, but the President’s determination to mock the IMF’s advice to reverse its Bitcoin policy has spooked international markets. When rating agency Moody’s announced a downgrade of the country’s credit rating in January, Bukele tweeted: “Breaking: The saviour DGAF”, an acronym for “don’t give a fuck”. Now Fitch says some form of default is likely in January.
Faced with rising inflation, the looming recession and a deteriorating budget situation, El Salvador cannot fire up the printing press because the country adopted the US dollar as its national currency in 2001. Instead, the government has drawn on its reserves to plug its budget hole. If the situation worsens, Membreño said the country could eventually be forced to move away from the dollar.
However, according to Membreño, accepting foreign financing from China would mark a definitive break with the US and bring the country closer to China, Russia and Turkey. “It would represent a total realignment of El Salvador’s foreign policy,” he said.
That funding wouldn’t come cheap, according to Evan Ellis, a senior associate at the Center for Strategic & International Studies in Washington DC. “China acts as a payday lender, they make good money from these deals,” he said. “But they often find a way to tie the loans to long-term commercial and strategic benefits that pave the way for Chinese companies.”
Since El Salvador ended ties with Taiwan in 2018China has agreed to build a stadium and library in the country, but its plans to convert the port of La Unión into a logistics hub have stalled.
Closer ties with China could also accommodate Bukele’s own ambitions. He has been criticized by the US and Europe for seeking re-election in 2024 in violation of the country’s constitution.
“When populist governments, whether left or right, come to power, China acts as an unbiased insurer,” Ellis said. “China can give Bukele financial independence to be authoritarian and ruthless to the constitution.”
With an approval rating of around 90%, Bukele remains the most popular president in Latin America based on a tenacious dealings with law and order and regular attacks on the old political elite.
When the Salvadorans elected him in 2019 after decades of corruption by traditional parties and increasing gang crime, many felt they had their last chance in the saloon.
But as a bitcoin player, Bukele didn’t know when to hold them or when to fold them. Closer ties with China would be another roll of the dice.