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El Salvador Debt Soars as IMF Says Progress Made Toward Deal

By Matthew Bristow and Maria Elena Vizcaino
A Bitcoin sign at a clothing stall on the one-year anniversary of Bitcoin adoption in San Salvador, El Salvador, on Wednesday, Sept. 7, 2022. One year into El Salvador's adoption of Bitcoin as legal tender, and more than 2,000 BTC bought by the government at near highs, the nation has lost more than half the value of its cryptocurrency purchases so far. (Camilo Freedman/Bloomberg)

(Bloomberg) -- Bonds from El Salvador were the biggest gainers in emerging markets Wednesday after the International Monetary Fund said it reached “preliminary understandings” with the nation as they negotiate a new lending deal.

Notes due in 2052 jumped 2.6 cents to 80.4 cents on the dollar, the biggest one-day advance in over a month, according to indicative pricing data collected by Bloomberg. 

“Progress has been made in the negotiations toward a Fund-supported program, focused on policies to strengthen public finances, boost bank reserve buffers, improve governance and transparency, and mitigate the risks from Bitcoin,” the Fund said in a statement Tuesday.

El Salvador has been in talks with the IMF to lock in a deal for over three years, and money managers see the any loan for the Central American nation as a catalyst for bond prices. 

“We have long held the view that a deal should take place,” JPMoran Chase & Co. analysts including Steven Palacio wrote in a note Wednesday. “The statement points clearly to a shift in winds in favor of this call, and shows that parties are close to a final agreement, and one should be wrapped soon.”

A key point of contention between the two sides has been the use of Bitcoin as legal tender in El Salvador, something the IMF has repeatedly expressed reservations about. 

“While many of the risks have not yet materialized, there is joint recognition that further efforts are needed to enhance transparency and mitigate potential fiscal and financial stability risks from the Bitcoin project,” the Fund said. 

Understandings were reached on improving the primary balance by around 3.5% of gross domestic product over a three-year period, the Fund said. Consolidation is expected to be achieved through measures such as “rationalizing” the public wage bill. 

The two sides also made progress on a plan to strengthen reserve buffers in the financial system, as well as on a strategy to enhance governance and transparency, the IMF said.  

(Recast with market reaction, adds analysts comments)

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