Why is El Salvador having problems with its creditors? Can it still be the “Singapore of Latin America”?

Bukele and his great announcements. The “Bitcoin City” ????. â ???? Bitcoin as legal tenderâ ????. Headlines, audience applause, and support from the Bitcoin community. He is an Elon Musk of Latin American politics. Young, charismatic, disrespectful and very medial. Without a doubt, the move was a great advertising success. On social media, we stand up with pure praise for the leader for his heroic move. We are definitely still in the honeymoon phase. Well, what do believers say about the “Singapore of Latin America”?

We already know the headlines. It would be a waste of time to write an article that simply recounts what is being said on Kryptotwitter. The idea here is to put yourself in someone else’s shoes. In the shoes of creditors and investors. Suppose we are believers in El Salvador. We have a capital. And we give it to El Salvador de Bukele. Does it inspire confidence? The US Charter d’Affaires announced that it would leave El Salvador very soon due to a lack of interest from the Bukele government. Apparently, The bilateral relations are getting worse and worse. Can El Salvador be the “Singapore of Latin America” ​​???? without the gringo capital?

Will the young libertarian who writes for Bukele on Twitter be able to compensate for the distrust of big business? Without the support of American, European, and Asian capital, it is virtually impossible to become a financial power. And I’m afraid these capitals are very attentive to the opinions of their regulators. This of course also includes the opinions of bodies such as the World Bank and the International Monetary Fund. Countries like El Salvador depend on these organizations for funding because the private sector does not want to take this risk. The risk of failure is too high. We are talking about countries with low institutionalization, high levels of corruption, economic instability and political instability.

Why is El Salvador having problems with its creditors?  Can it still be the “Singapore of Latin America”?
Why is El Salvador having problems with its creditors? Can it still be the “Singapore of Latin America”?

Bukele’s popularity in El Salvador is undisputed. He has popular support. And it has the support of the institutions. The man is in control. That means you can pass laws in a two-by-three. He takes the microphone, has a great rally and people applaud euphorically. but this style of â ???? strong and dear manâ ???? Falling so deeply in love with Latin Americans is precisely what does not inspire confidence in the eyes of international investors. Let us assume that El Salvador gets into a major economic crisis in a few years. It is entirely possible that the Caribbean blood had its effect and the government refused to honor its obligations by denouncing systematic exploitation by the Imperial forces. Poor people of El Salvador. Down with the empire! We don’t pay the debt. It’s social justice. Ouch!

Bukele’s defenders could say this is all part of a campaign to discredit the president. At heart, Bukele is a Messiah full of kindness and good intentions. After all, it is not a sin to want to be free and sovereign. The problem is that this story is very old. And history has repeated itself a thousand times. In reality it is not a conspiracy against the Salvadoran people. It’s common sense. Anyone who lends money wants their money to be paid back. If the borrower does not inspire confidence, the investor has the right not to do business with him. It’s that simple. It’s not a political problem as such. It’s more of a financial problem. Everyone lends money to Saudi Arabia, for example. It’s not about democracy, social justice or politics. You are business.

Now let’s say a friend asks us for a loan to start a business. As security, you represent your Bitcoin holdings to us. In theory, the idea is not bad. In fact, this system already exists. They lend you Fiat and you deposit crypto as collateral. Under certain conditions, this system does not mean any default risk for the creditor, as the creditor retains the collateral and can realize it if necessary. Unfortunately, the International Monetary Fund does not offer this service. I suspect this it is a matter of scale, volatility, and regulation. Gold is usually the preferred security. But we have to remember that the gold market is a much more mature market than crypto.

It goes without saying that a creditor should be concerned about his debtor’s practices. In the case of a country Currency stability is essential. If the currency falls too low, there is a risk of possible default. If the currency rises too high, the problem of early payment arises. Early payment can also harm the creditor. Because with an advance payment you lose money. On the other hand, if a currency rises too strongly, exports suffer. And if it sinks too low, imports suffer. These distortions hinder the government’s ability to generate income (taxes). Hence, there is a risk of failure to comply with its international obligations.

American debt is different because the debt is incurred in its own currency. This is an enormous advantage. But the United States has this luxury precisely because it can. You have the financial market for it. This is not the case in most Latin American countries. Out of obligation these countries must assume that debt is a foreign currency. Here the exchange rate is fundamental. Currency stability is of great importance when it comes to foreign currency financing.

El Salvador relies on Bitcoin, one of the most volatile assets in existence, as its legal tender. In addition, it intends to issue bitcoin-backed bonds to build a city. He wants money from international organizations, but with an “anti-imperialist” rhetoric. The â ???? strong manâ ???? from El Salvador does what he wants in his country. And he has the majority support. Finally a good politician! The problem is, believers don’t want good men in power. They prefer well-paying countries with strong institutions. No government of the people. We’re talking at least 10 years, 20 years, or 30 years of predictability.

Personally, I wouldn’t buy a Salvadoran bond. I prefer to buy bitcoin directly. Bukele is popular today. But in 10 years? I heard your speeches. In all honesty, he seems like the type of man who wouldn’t shake his pulse when it comes to failing to pay his debts. Suffice it to say a couple of times, and that’s it. What about my money? Goodbye, dove. All in the name of the sovereignty of El Salvador. Of course, El Salvador is free and sovereign. but Investors can also freely and confidently choose where to invest their capital. What do Wall Street, London, Hong Kong, Tokyo and Berlin think of investing in El Salvador? I leave the question in the air.

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