Nelson Renteria. Sarah Kinosian. Rodrigo Campos.

SAN SALVADOR/NEW YORK – El Salvador’s huge bet on Bitcoin, which Central American nations have been purchasing since September, is now in jeopardy. According to Reuters calculations, a cryptocurrency rout has shaved nearly a third from the government’s holdings.

El Salvador, under populist President Nayib Bukele, was a vocal supporter of the currency and went all-in with bitcoin. It became the first country in the world to accept it as legal tender.

El Salvador is facing other fiscal problems due to rising borrowing costs worldwide and the imminent repayment of large amounts of debt. However, the crypto crash has shut down some possible off-ramps to the crisis like the postponed Bitcoin bond.

Ricardo Castaneda (senior economist, country coordinator for El Salvador, and Honduras, think tank Central American Institute for Fiscal Studies, ICEFI) stated that “the government’s financial difficulties are not due to bitcoin” and added, “The government has gotten worse because bitcoin.” He said that bitcoin has “ceased to be an option and is now part of the problem.”

It has dropped 45% from the time El Salvador adopted it in September and 26% since May when its high was due to crypto assets that were swept up by a more risk-averse investing environment.

Based on CoinMarketCap data, the combined market value for all cryptocurrency fell to $1.2 trillion. This is less than half its November 2017 level.

El Salvador’s debt was $24.4 billion in December, down from $19.8 million at the end of 2019. This is after millions of dollars were allocated by the Bukele administration to combat the COVID-19 pandemic, and the economic consequences it had over the last couple years.

According to the International Monetary Fund, there will be a deficit in its current account for external finance-reliant and remittance economies of around $2 billion by 2025.

But adopting bitcoin set the country at loggerheads with multilateral lenders like the IMF, from which Finance Minister Alejandro Zelaya said https://www.reuters.com/article/us-el-salvador-economy-exclusive/exclusive-el-salvador-seeks-imf-funding-sees-golden-opportunity-for-economy-says-finance-minister-idUSKBN2AW1GV last year the government was seeking $1.3 billion.

According to the fund, El Salvador should abandon bitcoin completely. A credit line agreement must address all risks, including those associated with the adoption of Bitcoin as legal tender and risks related to economic Governance,” an IMF official stated Wednesday.

Rating agencies warn that Bitcoin adoption can facilitate money laundering. And, bond investors are urged to seek higher returns due to the increased risk of bitcoin.

On Wednesday they sought a record-breaking premium of 2,445 base points above U.S. Treasuries.

Bukele’s efforts to centralize power, which included the dismissal of the nation’s top court judges and the authorization to run for reelection immediately despite the constitutional term limit, have pushed the risk premium up.

Siobhan Murden, Amherst Pierpont head, Latin America Fixed Income Strategy said, “If bitcoin-growth dividends are not possible or innovative Bitcoin-financing is not feasible, then the Bukele government will have to prioritize spending priorities and determine financing options.”

Reuters’ calculations of a $36million paper loss in bitcoin (enough to make at most some coupon payments) are based upon Bukele’s tweets, and an estimation of the prices on purchase dates. It has spent approximately $104.2million on 2,301 bitcoins now valued at $67.9million using Wednesday’s volume weighted median price.

This year, the country will have to pay $329 million to cover interest on international bonds and $800 million for a January bond.

Castaneda, ICEFI’s director of finance, suggested financing options that include the Central American and Latin American Development Banks – CABEI (respectively) – to help pay the January payment of $800 million. He suggested that a nationalization of the nation’s pension fund could be an option to pay the fiscal deficit. This would involve transferring public savings into a government account.

According to Polina Kurdyavko (head of emerging markets, BlueBay Asset Management), a restructuring of El Salvador’s debt is inevitable if El Salvador continues its current policy mix. With the right (IMF-approved) program, El Salvador’s debt could be sustained. However, they must take action now.

Zelaya was the country’s financial minister and declined to comment on this article.

Salvadoran bonds are traded between 43.5 and 34 Cents per dollar, with the exception of the January maturity at 77.5 cents. This indicates cautious optimism about the possibility that that country will make the payment.

The cost to insure investors against a Salvadoran sovereign default over the next five years on Wednesday hit its highest level since 2020, according to S&P Global (NYSE:) data.