In September 2021, the Central American country of El Salvador made bitcoin legal tender, despite warnings from the International Monetary Fund (IMF) and the international community. A year later, the country is drowning in foreign debt as the value of the virtual coin plummets, and China is now looking to buy out the country's $21 billion external bond debt.
El Salvador's Crypto Craze
In a report, The Guardian tells us that the crypto-advocate country has already declared that it would soon sign a free trade agreement with China on the same day that cryptocurrency exchange FTX suffered a loss that pushed it to near default.
Furthermore, El Salvador Vice President Felix Ulloa told the press that, aside from participating in the aforementioned agreement, China has also offered to buy the country's foreign debt.
El Salvador has tried to go deep with bitcoin, to the point that it backed a nationwide campaign to promote the use of bitcoin and its localized wallet by handing out $30 worth of incentives.
Foreigners were also part of the grand scheme, as the government promised to grant residency to any non-citizen investing three bitcoins in the government.
But that is not where it all ends; El Salvador President Nayib Bukele has also expressed plans to use energy from the country's geothermal utility to mine bitcoin and announced plans to build the world's first "Bitcoin City" in an effort to boost investment in the country.
The nation is currently in a precarious financial situation. It can be recalled that El Salvador was required to pay $688 million in January as part of a Eurobond amortization.
Bukele predicted that the price of bitcoin would reach $100,000 at the beginning of the year and pledged that his nation would issue bonds in bitcoin to pay off its debt. The value of the virtual coin has dropped to $16,000 since the FTX crash.
Foreign Debt Woes
With inflation rising, the president's bitcoin investments crashing, and the fiscal situation deteriorating, El Salvador will still be unable to print money because the country adopted the US dollar as its national currency in 2001.
Instead, the government has used its reserves to plug the fiscal gap. According to economists, if the situation in El Salvador worsens, the country may be forced to abandon the dollar.
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"China has offered to buy all of our debt," Vice President Felix Ulloa said recently told Bloomberg when asked about a possible debt restructuring. "We are not going to sell to the first bidder, we need to see the conditions."
Ulloa did not go into further detail, but the statement suggests that the country is still looking for alternatives to outright defaulting on its dollar-denominated debt.
Although it is unclear how such a deal would operate, Bloomberg tells us that it is possible that China would provide El Salvador with financing for the country to repurchase its debt from bondholders.
After pinning the country's economic recovery on cryptocurrency, which obviously did not have a good outcome, El Salvador's President Nayib Bukele needs all the financial support he can get.
