As crypto-Twitter floods with apocalyptic memes about the bankruptcy of cryptocurrency exchange FTX and the sharp drop in the price of bitcoin, one account has remained notably silent on the subject.
Unlike in previous crashes, the president of El Savlador, Nayib Bukele, who made bitcoin legal tender a year ago, did not exhort his followers to buy “the dip”. The laser eyes, popular among cryptocurrency traders, have long since been removed from his Twitter profile.
On the day FTX declared insolvency, he announced that the country would sign a free trade agreement with China. Its vice president, Félix Ulloa, said China had offered to buy the country’s $21 billion in foreign debt as part of the deal.
The Central American country of 6.5 million finds itself in a difficult financial position. In January, it has to pay €667 million ($688 million) for a Eurobond amortization. At the beginning of the year, Bukele promised that his country would issue bitcoin-denominated bonds to pay off national debt and predicted that the price of bitcoin would reach $100,000.
But the so-called “volcano effects” never emerged and today the bitcoin price hovers around $16,000. The best tracker of the president’s opaque trading estimate that he spent more than $107 million on 2,381 bitcoins. Today, that investment is worth a little more than $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 Membraño, a Salvadoran economist. “There are no easy alternatives, no shortcuts.”
The bitcoin losses are relatively insignificant to the overall debt, but the president’s determination to flout advice from the IMF to withdraw its bitcoin policy has spooked international markets. When ratings agency Moody’s announced a January downgrade in the country’s credit, Bukele tweeted: “Breaking: El Salvador DGAF”, an acronym for “don’t give a damn”. Now Fitch says some form of default is likely in January.
With inflation rising, a recession looming and the fiscal situation worsening, El Salvador cannot 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 may eventually be forced to move away from the dollar, according to Membreño.
However, accepting debt financing from China would mean a definitive break from the US and move the country closer to China, Russia and Turkey, according to Membreño. “This will represent a total reshaping of El Salvadoran foreign policy,” he said.
That funding would not come cheap, according to Evan Ellis, a senior fellow at the Washington DC-based Center for Strategic and International Studies. “China acts as a payday lender, they make good money from these deals,” he said. “But they often find a way to link the loans to long-term commercial and strategic benefits that open 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 Unión into a logistics hub have stalled .
Closer ties with China may also suit Bukele’s own ambition. He drew criticism from the US and Europe for seeking re-election in 2024 in violation of the country’s constitution.
“When populist governments, from the left or the right, come to power, China acts as a non-judgmental underwriter,” Ellis said. “China can give Bukele financial independence to be authoritarian and denounce the constitution.”
With an approval rating of around 90%, Bukele remains the most popular president in Latin America, based on a heavy-handed approach to law and order and frequent attacks on the old political elite.
When Salvadorans elected him in 2019, after decades of corruption by the traditional parties and rising gang crime, many felt they were in the last chance saloon.
But as a bitcoin gambler, Bukele didn’t know when to hold them or when to fold them. Closer ties with China will represent another roll of the dice.