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US sanctions and slow IMF talks prompt warnings that El Salvador may be next crisis

After El Salvador’s bitcoin experiment dramatically backfired and default risk spiked, the country’s democratic backsliding is making financial relief more difficult. President Nayeb Bukele’s government faces an $800 million bond payment in January 2023. The cash-strapped government lacks the funds for payment, with Bloomberg projecting El Salvador is the most likely country in Latin America to default.

To make up for its funding shortfalls, San Salvador has been trying to obtain a $1.3 billion loan from the IMF. However, the slow-moving talks reflect mutual antagonism, with the Fund repeatedly calling for a reversal on its bitcoin move and Finance Minister Alejandro Zelaya stating that the IMF would have the least impact on the country.

Complicating talks, the administration’s increased authoritarianism has led the US to sanction “corrupt and undemocratic actors,” including key Bukele advisors, congressional allies, and cabinet officials. If the badly needed IMF deal does not materialize, the Bukele administration is considering nationalizing pension funds, issuing new taxes, and going to other institutions like the World Bank and Central American Bank for Economic Integration, El Faro reported.

Some investors see opportunity in the turmoil. Morgan Stanley argued in a research note that El Salvador’s $7.7 billion in Eurobonds have been “overly punished” by the market and says its 2027 bonds, currently trading at 28 cents on the dollar, should trade at an average of 43 cents given the country’s economic fundamentals.

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