Bukele: Evaporate the Debt
It’s risky. It’s cynical. And it could backfire spectacularly. But when has that ever stopped Bukele?
Crypto adoption in El Salvador has been underwhelming. There’s a beach with crypto things and people can buy Wendy’s with bitcoin … but that's it. Meanwhile, financial markets are in uproar and the country is on the brink of insolvency.
There’s a small window of opportunity for crypto to turn El Salvador’s fortunes around. It’s never been done before. It’s risky. It’s borderline illegal. It’s immoral. And it could backfire spectacularly. But when has that ever stopped President Bukele?
Step 1. Cancel the Volcano bond. Sell Memes Instead.
Last week, we talked about El Salvador’s plans to issue a billion-dollar Volcano bond that only redditors and crypto “degens” are interested in. If you’re going for that audience though, ditch the bond. Don’t create an actual $1 billion dollar liability that has to be repaid by El Salvador. Drag your feet on the Volcano until everyone forgets about it and sell memes instead.
Sell NFTs that give legal ownership of plots of land on Bitcoin city. P2E games that don’t exist yet are selling land in the metaverse and it’s working so why shouldn’t this? Be the FiRsT eVeR pRoPerTY sYsTeM to be governed on-chain. Raise revenue with a royalty on the resale of the NFTs. Sell governance tokens to vote on things and sell “utility tokens,” whatever those are. Use all the good words: Public key cryptography. Distributed ledger. Censorship resistance. Airdrops.
This is not (entirely) a joke.
Indefinitely postponing the Volcano bond is good considering the country’s already-high debt and the fact that it will raise little unrestricted cash. Monetizing otherwise worthless land in El Salvador is also good, especially if it draws investments and putting it on-chain jacks up the valuation. Finally, appearing unhinged will lower bond prices some more, which is usually bad but not in this case…
Step 2. Scare Bondholders Some More.
Next, pretend you don’t even want to pay the international bonds. Start with an investigation of a particular debt issuance from way back when, in the last government, the one that was super corrupt. Then make someone sue – have them claim that paying the bonds is illegal – and make sure the lower court agrees.
Then have the supreme court agree. Then say you respect the high court and that you won’t pay any international debt until the whole issue gets sorted out. Maybe even repudiate the debt, or pretend to anyway.
Once you do all that, the bonds will really plummet.
Step 3: Get a Huge Loan in Secret
Next, you need like two billion dollars cash, and nobody can find out about it. Not even the staff at El Salvador’s Central Bank and Finance Ministry. Not even the Bukele brothers, who oversee a bunch of ministries. Nobody. The money needs to flow directly to a Wall Street veteran, a firm that can work the phones when the time comes and keep its mouth shut until then.
Two billion dollars sounds like a lot, but the issuing partner of the Volcano bond, iFinex, might recover about $4 billion in bitcoin that was stolen from their exchange in 2016. They may be able to lend half of that for the country that’s making all the bitcoin headlines. Other whales might be able to lend that much as well. Two billion is small potatoes for crypto.
Step 4. Pull the Trigger. Evaporate the Debt.
And then – this is the masterstroke – while Traditional Finance is having a fit about the memes, the courts and the bad attitude, pull the trigger and evaporate four billion dollars in sovereign debt. How? By taking the two billion dollars from iFinex or the whale and buying back six billion dollars in El Salvador’s debt for 30 cents on the dollar.
The market value of a country’s bonds usually plummets when the president goes off the rails and no one expects the bonds will be repaid. Distressed debt is then sold for a loss and bought by speculators or vulture funds, but not if the issuing government buys them first.
If your Wall Street partner buys billions of dollars of debt at a deep discount on El Salvador’s behalf, the country will stop owing that money to third parties and extinguish the liabilities. The further you make the bonds fall, the cheaper the debt wipe-out will be.
If it all plays out according to plan and the country repurchases its bonds for 30 cents to the dollar, a net $4 billion in debt can disappear from El Salvador’s books, lowering the debt to GDP ratio from about 88% to 74% overnight.
A good trade, as Matt Levine would say.
Step 5. Pivot to Normal.
After wiping out more than the cost of the pandemic in debt, Bukele can pivot to doing relatively benign crypto stuff. To just letting people pay for Wendy’s with Bitcoin. He can walk back the debt repudiation and trumped-up lawsuits – even admit they were a bluff – and show markets how the brilliant bond buyback saved El Salvador’s finances.
Wall Street will be humiliated. They’ll also be impressed. If Bukele is mostly normal for a while and plays nice with the IMF, he’ll be able to issue regular debt for low interest within a year or two and borrow from multilaterals in the meantime. Credit markets have a short memory.
It’s an immoral, fradulent, high stakes gamble that could backfire spectacularly. But again, when has that ever stopped Bukele?
(There is a literature from the late 80s and early 90s that argues against debt repurchases, e.g. Bulow and Rogoff (1991) and Bulow, Rogoff and Dornbusch (1988). The basic idea is that when countries are in default, repurchasing debt from creditors, even at a deep discount, is a sub-optimal use of scarce resources; that other spending could improve welfare more. I don’t disagree. I just think El Salvador’s case is different, since the country is not (yet) in crisis. El Salvador’s case is closer to Ecuador in 2008 than Latin America at the end of the 80s).
(Many years ago, before Venezuela’s debt default and hyperinflation, I wrote a short story about a fictional debt repurchase in that country, orchestrated jointly by the government and its political opposition. It never happened).