El Salvadors dollar debt dives on Bitcoin bond plans

El Salvadors dollar-denominated bonds have fallen to an all-time low as the Central American nations debt started trading in distressed territory this week.

El Salvadors United States dollar bonds fell to $0.644 on Monday, Nov. 22, following the weekend news that the Central American country would use Bitcoin (BTC) bonds to fund its Bitcoin City initiative. Dollar bonds have fallen steadily since April 2021 when they topped $1.10 according to Bloomberg data.

A dollar-denominated bond is a bond issued outside of the U.S. by a foreign company or government that is denominated in USD instead of local currencies.

Mondays drop resulted in the countrys debt becoming among the worst performers in global trading, Bloomberg reported. Investors are concerned that President Nayib Bukele has shut out the International Monetary Fund (IMF) from assisting the nation with development funds.

Nathalie Marshik, managing director of investment banking company Stifel Nicolaus, commented that this announcement cements the anything-but-the-IMF path before adding that bonds are falling as the market reassesses possible recovery value lower on the unpredictability of policies.

The Bitcoin bond will pay 6.5% annual interest in addition to 50% of El Salvadors Bitcoin gains once its initial investment costs for its mining infrastructure have been recovered. Dividends will be paid in USD or Tether (USDT), according to Samson Mow, chief strategy officer of Blockstream.

Mow believes that the Bitcoin bond will be an alternative way for institutional investors to gain exposure to Bitcoin without having to hold Bitcoin themselves. It will also be a way for investors to help El Salvador develop more rapidly. Mow, who has been working with the El Salvador government on developing the Bitcoin bond, told Bloomberg TV on Tuesday:

Were trying to structure this in a way that people can present [the Bitcoin bond] to boards and directors as a normal bond because it is a normal bond. It just happens to have a large chunk of Bitcoin tied in.

In response to Mows interview with Bloomberg, podcaster and popular Bitcoin advocate Anthony Pompliano predicted that they will be ridiculously oversubscribed.

El Salvador has been in talks with the IMF for much of 2021 over a possible $1.3-billion loan. Those talks could be fading into obscurity, as President Bukele has decided to fund more local initiatives such as school building with Bitcoin over USD.

Related: El Salvador to build 20 Bitcoin Schools with surplus from Bitcoin Trust

The IMF issued a concluding statement regarding El Salvadors funding request on Monday. Although El Salvadors economy has rebounded quickly from the pandemic, fiscal deficits and high public debt services are creating bigger holes in the services the country can provide, it stated.

The report added that efforts to improve financial inclusion and raise growth are welcome, but risks arising from Bitcoin as a legal tender, the new payments ecosystem, and trading in Bitcoin should be addressed.

Because of those risks, Bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the Bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem.