Morgan Emerging Markets Bond Global Diversified Index, an unmanaged, market-capitalization weighted, total-return index tracking the traded market for U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.
With the Biden administration more explicitly tying its foreign policy to “human rights” than did President Trump, and China’s newfound focus on climate change pushing bitcoin miners overseas, cryptocurrencies may be an increasingly attractive hedge for populist leaders on the fringes of the “Washington Consensus”.4 There is also concern that the fringes are fraying: according to an IMF blog published late last year by Reinhard & Rogoff “here is brewing in the background a growing need for debt restructurings in numbers not seen since the debt crisis of the 1980s.” Currently 5% of sovereign issuers are in default.5 The comparable 1980s ratio was 40%.6 A U.S.
Dual market: Dual exchange rate setup where a currency has a fixed official exchange rate and a separate floating rate applied to specific goods, sectors or trading conditions.
bitcoin miner Marathon Digital chimed in with a request to collaborate.9 Google searches for El Salvador real estate reached an all-time high, particularly of bitcoin-friendly “El Zonte”, or “Bitcoin Beach” as it is now known, a $200 million tourist development an hour’s drive from the country’s capital, San Salvador.10 This has attracted significant Chinese funding in recent years according to Global Times, including $35 million in funding for a sewage and wastewater treatment plan as part of a recently expanded “without conditions” $500 million Chinese pledge to El Salvador.11 (Sugar exports to China rose 105% year-on-year in 2020, Torino Economics reported on June 11, 2021.
But how can we begin to think about EM economies and crypto in an organized way? We believe that their underlying debt dynamic could be one good lens to use in thinking about the kinds of countries that might be especially attracted to crypto.
If debt and debt service are too high to be realistically serviced, it may become a “why not, because I’m never gaining market access anyway.” Argentina might never be able to repay the more than $60B it owes to the IMF, so why try hard to repay it? El Salvador has over $3B in debt payments due next year, which it cannot repay without an IMF agreement and the market access that provides.
The table below gives you a sense of the types of debt pressures different EM countries are experiencing, as a lens on which countries may be likelier to move to crypto.
This week we start with an important project to innovate Paraguay in front of the world! The real one to the moon 🚀#btc & #paypal.”18 The CEO of Paraguayan bitcoin mining company Bitcoin.com.py then told Coindesk TV that Paraguay is “an attractive country to crypto investors” because mining in Paraguay only requires registration and payment of taxes, which he classified as lower than in the rest of the region .
If you are interested in building it, you can contact me.”20 Panama taxes capital gains at 10% and income at a max of 25% for residents and 15% for non-residents, according to Greenback Expat Tax Services, a consultancy.
Meanwhile Guatemala is currently locked in a high-stakes negotiation with the Biden administration over a $4B aid package meant to stem a migrant crisis at the U.S.
There is currently $147B in outstanding IMF debt, of which El Salvador accounts for just $389 million, or 22 bps.28 And yet a potential El Salvadoran default carries enormous implications.
The desperate bondholders were to be left with just the company’s brick and mortar stores.29 “It’s like someone takes your wallet out of your back pocket on the subway and stares at you right in the face while doing it,” said the hedge fund manager and Neiman creditor Dan Kamensky, who became so alarmed by the prospect that he broke the law attempting to interfere and is now headed for six months in prison.
Macro and digital assets investors should be laser-focused on the busy political calendar in Latin America this year.31 Though the region is no stranger to political polarization and regulatory volatility, El Salvador’s bitcoin ploy may be the beginning of an anti-Washington consensus to adopt a monetary alternative that can be manufactured with stranded CO2.
The information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time.
The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear.
In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice.
As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.