El Salvador was supposed to issue $1 billion of Bitcoin Volcano Bonds this week — or maybe $1.5 billion … and yesterday, Finance Minister Alejandro Zelaya announced that the bond issue had been postponed. [Elsalvador.com, in Spanish; Reuters]
The official reason for the delay is the war in Ukraine. Also, the government has discovered that the price of Bitcoin is very volatile!
Any moment now
Zelaya raised the possibility of the war in Ukraine delaying the bond issue a couple of weeks ago. [Reuters]
Zelaya was interviewed on local television last night, Tuesday 22 March, confirming the delay was because of Ukraine … and because Bitcoin is volatile. Apparently, nobody in the government had noticed this in the past several months.
Zelaya wants to issue the bonds before June 2022, and definitely before September. “In May or June the market conditions are a little different. At latest, in September. After September, if you go out to the international market, it’s difficult.”
Zelaya repeated his February claim that the Bitcoin Bond was already oversubscribed — “I think we’re going to have a fairly substantial oversubscription that we could channel to the country’s other financing needs.”
Why delay the bond, then? Did all those buyers disappear? Surely the buyers you had lined up weren’t all freshly-sanctioned entities.
Institutional investors and financial analysts think the Bitcoin Bonds are trash — even with Zelaya pitching the bonds to analysts personally. [FT, paywalled]
There’s still no bond prospectus — just some slides from last November, and whatever Zelaya says on TV.
The laws to enable the bond issue have not yet been put to the Legislative Assembly — even though President Nayib Bukele said some would be put forward by mid-March: “52 reforms in the oven … First 10 coming out next week.” [Twitter]
Samson Mow, who seems to have been the main designer of the Bitcoin Bonds, quit Blockstream on 1 March. Mow is looking to branch out into “nation-state Bitcoin adoption!” There’s no information on whether Mow will still be having anything to do with El Salvador and its Bitcoin Bonds. [Twitter]
By pure coincidence, a billion new tethers were just printed this morning. [Twitter]
Sovereign power plant debt
The Bitcoin Bonds were marketed as a new form of sovereign debt. This turns out not to be the case — the bonds are being issued by LaGeo, the national geothermal power company.
This detail was revealed in a Financial Times article on the bonds: “The crypto bond will be issued by state thermal energy company La Geo, according to investors and bankers.” [FT, paywalled]
Does LaGeo have the cash flow to pay back billions of dollars in bonds? Of course it doesn’t. Frank Muci runs some numbers. [Substack]
LaGeo’s 2021 revenue was $136 million, for a profit of $36 million. LaGeo has $773 million in assets, but they’re not at all liquid — about half the assets are long-term loans to local electricity distributors, and a lot of the rest is the power plants themselves. [statement, in Spanish]
The company owes $200 million in long-term debt, from when it securitised part of its future cash flow. The company had to defer payments on this in 2021 because of the COVID pandemic. [Zumma Ratings, PDF, in Spanish]
LaGeo is too small to be able to afford to pay $65 million annually in interest payments on a Bitcoin Bond without the money coming from somewhere else — the payments would be half the company’s annual revenue, and twice its current profits.
So why LaGeo? Muci sees the obvious trick:
- El Salvador can default on their existing sovereign debt without affecting Bitcoin Bond holders;
- If LaGeo goes broke, then Bitcoin Bond holders have very little recourse.
Zelaya confirmed the bonds would go out via LaGeo in last night’s TV interview: “If the debt is issued by LaGeo or by the Salvadoran state, in the end it’s always a state debt, because who owns LaGeo? Because all the shares are owned by CEL, even if it’s autonomous. Because if CEL goes bankrupt, it has to be saved by the state.”
That may not hold legally. LaGeo is an ordinary corporation that’s owned by another ordinary corporation, CEL, that’s owned by the country. So if LaGeo defaults, bond holders might at best get to be creditors in a bankruptcy.
The Financial Times article also details the lack of Bitcoin adoption in El Salvador:
A senior executive at one bank said fewer than 0.01 per cent of debt payments were being made in bitcoin, while another from a rival said they had seen an “irrelevant” number of transactions.
The government says that Bitcoin’s been popular with tourists — i.e., Bitcoin tourists.
Camarasal, the Salvadoran chamber of commerce, runs a regular survey of small businesses. In the March 2022 survey, 91.7% said Bitcoin had made no difference to their business. 14% have made even a single sale in Bitcoin — 86% made no sales at all in Bitcoin. Only 3.6% said Bitcoin had increased their sales. [Camarasal]
How about remittances, apparently the number one use case for Bitcoin? BCR, the central bank, was asked by news agency EFE what value in remittances had been sent via Chivo between September 2021 and January 2022. BCR refused to answer, on the grounds of customer confidentiality. [Yahoo! News, in Spanish]
Rest of World: “Interviews with dozens of Salvadoran citizens, economists, and technology developers reveal cracks in the project.” Chivo doesn’t work well, and its customer service is unhelpful. Businesses around Bitcoin Beach are reverting to accepting only cash. [Rest of World]
But Chivo’s getting fixed, right? Bitcoin Magazine has an article on AlphaPoint trying to fix the Chivo Wallet system. Even Bitcoin Magazine had to admit that actual Salvadorans hate this nonsense because it’s broken rubbish. Though the magazine took care to explicitly disclaim the article at the bottom. [Bitcoin Magazine]
What happens next?
Bukele has too much ego tied up in the Bitcoin project — he’s unlikely to just kick it into the long grass. At least, not immediately.
It’s possible that AlphaPoint can build a Chivo system that works reliably. Then their problem will be getting back the trust of the public.
All politics is local, and Bukele’s government has other issues. The government plan to take over the national pension scheme — *psst* they want to steal it — has been delayed. Fresh news of corrupt government figures and liaisons with the drug gangs keeps coming out. The government nationalised a private bus company, for reasons that make no coherent sense — *psst* they’re stealing it — and then it hasn’t been able to run the buses properly.
It’s always the material, on-the-ground issues that really do in a government. Bitcoin’s local image is as a bad idea that doesn’t work, and is being used to steal everyone’s money, again.
President Bukele is speaking at Bitcoin Miami on 9 April. We’ll see what malignant and diseased rabbits he pulls out of the hat by then.
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