El Salvador Weekly: Bukele’s ‘Magical Thinking’

Giving Salvadoran President Nayib Bukele the courage of his convictions, bitcoin’s collapse below $20,000 from its November high of nearly $70,000 hasn’t dimmed his enthusiasm one bit. Bukele announced on Twitter on June 30 that the country had bought another 80 bitcoins at $19,000 each, coming in a little over $1.5 million.

He wrote “#Bitcoin is the future! Thank you for selling cheap.”

That brings its total to 2,381 BTC by the widely accepted count based on Bukele’s tweets on the subject — which are as close to hard data as the populist president’s administration has released.

Actually, his current tweet may have supplied more data, as it contains a screenshot of bitcoin purchases that looks like it came from a centralized exchange’s website, rather than an over-the-counter (OTC) trading desk that would be more common for an account as high profile and as large as El Salvador’s national account. And kind of makes you wonder about its crypto custody solution and security.

It brings the amount El Salvador has spent on bitcoin to more than $106 million, with a current value of about $49 million — down about 56%.

While the president’s bitcoin policy is enormously unpopular and reports suggest that the relatively few citizens who buy with it and merchants who accept it — as required by law — is dropping, it has not affected his staggeringly high polling numbers that range from 85% to 90 % approval ratings. Bukele is in the middle of a war on gangs that has led to tens of thousands of arrests and detentions following a wave of violence.

That said, the purchases are aggravating an already dangerous economic situation, with an €800 million bond debt payment less than six months off and the International Monetary Fund (IMF) unwilling to move forward with an expected loan ever since El Salvador made bitcoin a legal tender on with the US dollar. With a potential default hanging over the country, its bonds are trading at about 35 cents on the dollar, Bloomberg reported. That puts it close to Ukraine, which is in the midst of being invaded by Russia.

Frank Muci, a policy fellow at the London School of Economics with experience advising Latin American governments on financial issues, told CNBC last week that the “economic policy of the country is essentially magical thinking.”

Pointing to the “eye-gouging rates” that El Salvador is paying to borrow money on the bond market, Muci added, “They’ve spooked the bejesus out of financial markets and the IMF.

“The country is sleepwalking into a debt default.”

Crypto Unconstitutional?

Local news outlet El Diario de Hoy on its ElSalvador.com website interviewed an attorney who argued that the bitcoin purchases may violate the country’s constitution, and two other lawyers said that spending funds that were not budgeted to buy bitcoin could constitute “embezzlement of state funds.”

Another said that the government has not made clear where in the state’s budget the funds used to purchase bitcoins are coming from.

The article added that economist Luis Memberño said in a recent television interview “that the portfolio of those Bitcoin ‘is in the name of Bukele, since it is on his phone. He has the keys,’” attributing it to the president’s Twitter posts — which have included comments about buying bitcoin in very casual circumstances. Such as “naked” The New York Times reported.

The newspaper also equated Bukele’s actions to the opinions of broader cryptocurrency supporters, saying Bukele’s bitcoin “bet appears to be backfiring, highlighting the gap between the utopian promises of cryptocurrency’s proponents and economic realities.”

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