The recent plunge in Bitcoin’s value has had a profound impact on El Salvador, the nation that famously adopted BTC as an official currency.
President Nayib Bukele’s bold embrace of cryptocurrency has introduced significant instability into the country’s debt markets, raising alarm among investors worldwide.
Bukele made global headlines by becoming the first head of state to legalize Bitcoin alongside the US dollar. Despite recent market turmoil, he remains committed to his strategy of purchasing “one Bitcoin daily.” However, this latest downturn has inflicted losses amounting to hundreds of millions on government-held crypto assets and complicated ongoing negotiations for a $1.4 billion loan with the International Monetary Fund (IMF).
Financial markets are increasingly wary, as evidenced by rising credit default swap (CDS) premiums for El Salvador reaching their highest point in five months—signaling growing skepticism about its crypto-centric approach.
Last week saw El Salvador’s dollar-denominated bonds suffer the steepest drop among emerging economies. Although some recovery occurred following a broader rally in emerging market debt, concerns persist.
Investors highlight two main risks: potential friction with the IMF over continued Bitcoin acquisitions and delays in pension system reforms. A collapse of IMF support could undermine one of El Salvador’s key financial pillars; its bonds have been regarded as an emerging market success story with yields exceeding 130% over three years.
Christopher Mejia from T Rowe Price noted that “The IMF may resist using loan disbursements for Bitcoin purchases,” adding that ongoing declines in BTC prices exacerbate investor unease.
The IMF confirmed discussions remain active regarding pension reform and cryptocurrency purchases, emphasizing efforts toward transparency and better understanding these transactions.
Bitcoin’s price drop—over 22% since late January—has translated into losses up to 2.6 cents per dollar on bonds maturing in 2035. More broadly, BTC is down nearly 46% from its October peak.
Bloomberg estimates show that El Salvador’s Bitcoin holdings have shrunk from roughly $800 million to about $500 million while international reserves stand near $4.5 billion.
The second review under the IMF program has stalled since September due to delayed pension system analysis publication; meanwhile, March’s third review is crucial for continuing loan disbursements and repayments.
Jared Lou at William Blair Emerging Markets Debt Fund warned that persistent Bitcoin buying could jeopardize future IMF assessments—and losing this support would likely trigger sharp negative reactions from markets.
Despite challenges, some stability exists: certain El Salvadoran bonds have established price floors or even trade above par value—a factor partly attributed to Bukele’s strong ties with U.S authorities—the largest stakeholder within the IMF framework.
An analyst at Oppenheimer named Thomas Jackson remarked that “Bukele appears willing to test program boundaries leveraging his favorable relationship with Washington.”
Certain experts speculate whether El Salvador might eventually withdraw entirely from its agreement with the IMF and turn directly toward U.S.-based financing alternatives—a move which could risk dismantling critical elements underpinning recent investor confidence in national debt instruments.
This year alone sees bond repayments totaling $450 million expected; next year projections rise close to $700 million—with pension liabilities forecasted at around six percent of GDP post-April deadlines.