Unlike previous crashes, the president of El Salvador, Nayib Bukele, who made bitcoin legal tender a year ago, did not urge his followers to “buy the plunge.” Laser eyes, popular among cryptocurrency traders, have long since been removed from his Twitter profile. On the day FTX filed for bankruptcy, it announced that the country would sign a free trade agreement with China. His vice president, Félix Ulloa, said China offered to buy the country’s $21 billion in foreign debt as part of the deal. The Central American country of 6.5 million people is in a difficult economic position. In January it has to pay 667 million euros ($688 million) in amortization of a Eurobond. Earlier this year Bukele promised that his country would issue bitcoin bonds to pay off the national debt and predicted that the price of bitcoin would reach $100,000. But the so-called “volcano bonds” never appeared, and today the price of bitcoin hovers around $16,000. The best tracker of the president’s opaque transactions estimates that he has spent more than $107 million on 2,381 bitcoins. Today that investment is worth just over $40 million. “If Bukele dreamed that he could create a different and innovative political economy, against the advice of the IMF, that dream has failed,” said Luis Membrano, a Salvadoran economist. “There are no easy alternatives, there are no shortcuts.” Bitcoin losses are relatively insignificant to overall debt, but the president’s determination to scoff at the IMF’s advice to backtrack on its bitcoin policy has spooked international markets. When ratings agency Moody’s announced a downgrade of the country’s credit rating in January, Bukele tweeted: “Breaking apart: El Salvador DGAF,” an acronym for “don’t give a fuck.” Now Fitch says some form of default is likely in January. With inflation rising, a recession looming and the fiscal situation worsening, El Salvador is unable to turn on the printing press because the country adopted the US dollar as its national currency in 2001. Instead, the government dipped into its reserves to cover its fiscal hole. If the situation worsens, the country could eventually be forced away from the dollar, according to Membreño. However, accepting debt financing from China would mean a definitive break with the US and bring the country closer to China, Russia and Turkey, according to Membreño. “It would represent a complete readjustment of El Salvador’s foreign policy,” he said. That funding wouldn’t come cheap, according to Evan Ellis, a senior fellow at the Washington-based Center for Strategic & International Studies. “China acts as a payday lender, they make good money on these deals,” he said. “But they often find a way to tie the loans to long-term commercial and strategic benefits by paving the way for Chinese companies.” Since El Salvador ended its relationship with Taiwan in 2018, China has agreed to build a stadium and a library in the country, but its plans to turn the port of La Union into a logistics hub have stalled. Closer ties with China could also suit Bukele’s ambitions. He has come under fire from the US and Europe for seeking re-election in 2024 in violation of the country’s constitution. “When populist governments, left or right, come to power, China acts as an uncritical underwriter,” Ellis said. “China may give Bukele financial independence to be authoritarian and ignore the constitution.” With an approval rating of around 90%, Bukele remains the most popular president in Latin America, based on a strict law-and-order approach and regular attacks on the old political elite. When Salvadorans elected him in 2019, after decades of corruption by traditional parties and spiraling gang crime, many felt they were on their last chance. But as a bitcoin player, Bukele didn’t know when to hold and when to fold. Closer ties with China would represent another twist.
