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The IMF sees legal, economic problems with El Salvador’s bitcoin withdrawals

The International Monetary Fund said Thursday it has economic and legal concerns about El Salvador’s move to make bitcoin a parallel legal tender, further obscuring the prospects for an IMF-backed program and widening the country’s bond yields.

El Salvador has become the first country in the world to adopt bitcoin as a legal tender, with President Nayib Bukele announcing the use of its potential to help Salvadorans living abroad send money transfers home. Read more

“The adoption of bitcoin as a legal tender raises a number of macroeconomic, economic and legal issues that require very careful analysis,” Gerry Rice, an IMF spokesman, said during a scheduled press briefing.

“We are following developments closely and we are continuing our consultations with the authorities.”

Foreign investors worried about the future of an IMF deal, which they see as the key to the Central American country, have demanded ever-higher premiums to keep Salvadoran debt.

The spread on JPMorgan EMBI’s Global Diversified Index (.JPMEGDELSR) of unsecured US government bonds jumped 61 basis points (bps) on Thursday alone to trade at 683 bps, the highest level since February 22nd. The daily average over the last 21 trading sessions is 1.86 bps.

“We see the bitcoin headlines from El Salvador as noise that could complicate discussions with the IMF,” Citis Donato Guarino said in a recent note to clients, further reducing the bank’s already underweight exposure to the country.

Rice said the fund will meet with Bukele later on Thursday to discuss the bitcoin law. El Salvador is in talks with the IMF to seek a nearly $ 1 billion program.

“Crypto is a very marginal story for the Salvadoran investment thesis,” said Patrick Esteruelas, head of research at Emso Asset Management in New York.

“Whether El Salvador will be attractive (to investors) or not depends on Bukele’s ability to use its undoubted political capital to bring a large consolidated fiscal deficit under control.”

El Salvador’s law means that bitcoin will have equal footing with the dollar, which became its official currency 20 years ago. Read more

“The law itself does not cast doubt on the feasibility of the project, nor does it add any confidence that the development will put the IMF program back on track,” said Nathalie Marshik, head of EM sovereignty research at Stifel.

El Salvador bonds traded lower in price across the curve on Thursday, with issues 2027 and 2052 falling 1 cent each on the day.

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