Nayib Bukele, El Salvador's president, has always presented himself as a maverick. He is not afraid to go against the traditional ways of doing things, to — as he would have you believe it — improve the situation of his country. But in financial markets, he is getting creative for all the wrong reasons.
El Salvador has not issued a new bond for a long time, due partly to Bukele's erratic policies since he took power in 2019. Its bonds have traded at distressed levels for part of that time, though they have recovered to better levels more recently.
Last week, the Central American country issued a $1bn six year amortising bond that came with an unprecedented feature. Alongside the conventional new issue paying a wince-making yield of 12%, investors received an extra, warrant-type instrument.
This will pay investors 0.25% for the next 18 months. After that, this rate will jump to 4% for the rest of the bond's life, unless El Salvador has met one of two conditions. Either it must agree a new deal with the International Monetary Fund, or it must be upgraded from B-/CCC+ to B/B.
The basic idea was clear. El Salvador's old 2030 bonds were trading at around an 11.5% yield, a level often considered unsustainable.
To convince investors to buy a new bond, the country wanted to demonstrate its commitment to getting the IMF programme that bondholders want to see. Not only would the programme bring El Salvador fresh, cheap money — securing it would also require signing up to some more conventional economic policies.
Latin American governments love to innovate to get out of tricky debt situations, and — to some extent — it worked. El Salvador raised $1bn, after all.
But, at 12% plus whatever the warrant ends up costing, this is not innovation that should be applauded.
This structural feature, rather than proving the country's commitment to debt sustainability, was little more than financial engineering. It allows El Salvador to kick the can down the road on the real issues it does not want to tackle, by raising cash to deal with its immediate needs.
The wheeze was necessary in part because the country's fiscal performance, after initially improving under Bukele, had been slipping ahead of the election in February this year, which he won with 85% of the vote.
Contradictory signalling
The government also needed the bond because the best way to tackle El Salvador's acute financing challenges — an IMF programme that would unlock plenty of other cheaper funding and send its bond yields tumbling — is in fact not on the cards for a while yet, even if this bond was designed to signal the opposite.
El Salvador claims to desire an IMF programme but has been talking about one for at least three years, with very little action. The IMF and the government do not see eye-to-eye.
Above all, Bukele's enthusiasm for Bitcoin, for which crypto fans laud him as a visionary, is not in keeping with the financial stability and prudence the IMF wants to see. In 2021 El Salvador became the first country in the world to accept Bitcoin as legal tender.
It is hard to escape the conclusion that the real reason for this deal is that El Salvador would rather negotiate with the IMF if its major shareholder, the US, was led by a Donald Trump government.
Wishful thinking, most say, as the IMF is independent. But Bukele is quite openly striving to get close to Trump.
In the meantime, the $1bn received today will remove default risk in 2025 and enable the government to pay arrears to local contractors.
Ultimately, all this transaction achieves is to enable Bukele to keep a cash crunch at bay — at a shocking cost to the country in high interest payments.
No matter what the hordes of crypo fanboys may say in the president's replies on X (formerly Twitter), buying back low coupon debt using extortionate short term financing is not "ensuring financial stability".
Nor is it "commendable", a "responsible fiscal practice", "visionary", a notice to "the IMF, Bank of England and US government", or indeed "going to shut up some people" (perhaps apart from credit analysts who have been dumbfounded into silence either by how disastrous they believe this deal is, or because they don't want to be the latest to be torn apart by Bukele on social media).
Rather, this bond is plunging El Salvador further into debt distress.
Several bond investors know this, and yet still bought the deal. Ultimately, the country's debt load is not so unsustainable — an IMF deal could turn things around quite sharply.
And maybe Bukele is correct to think he might get a better deal with a new US administration. Standing aloof from a rally of several hundred basis points is not a good place to be; fear of missing out will have driven the thinking of many buyers.
But let's not be taken in by the funky structure. Governments borrowing at this level are desperate. Doing it when there are better options available, like coming to terms with the IMF, is irresponsible. Doing it while saying you will take that better option, but only when you feel like it, is verging on reprehensible.