The rating agency Moody’s Investors Service downgraded the government of El Salvador due to uncertainty about the possibility of new funding from the International Monetary Fund (IMF) after the country introduced Bitcoin as legal tender.

On June 9, the El Salvador Legislative Assembly passed the world’s first law to make Bitcoin legal tender in the country, so that both the US dollar and Bitcoin are now legal currencies for processing transactions.

The Central American country is reportedly in talks with the IMF over a nearly $ 1 billion financing deal. In the meantime, the IMF has warned its member countries that the risks and costs of adopting cryptocurrencies as legal tender outweigh the benefits.

“The most direct cost of widespread adoption of a crypto-asset like Bitcoin is macroeconomic stability … As a national currency, crypto-assets – including Bitcoin – pose significant risks to macro-financial stability, financial integrity, consumer protection and the environment,” said the IWF recently posted on a blog.

In its rating action report published on Thursday, Moody’s lowered the long-term foreign currency and senior unsecured ratings from El Salvador to Caa1 and maintained the negative outlook.

“The negative outlook for the Caa1 rating reflects Moody’s view that the budgetary position remains fragile and prone to funding shocks that could jeopardize the state’s ability to repay ahead of its ambitious January 2023 foreign debt repayment schedule,” the IMF said.

“The limited availability of funding alternatives for the state and the uncertainty surrounding the possibility of new funding from the IMF suggest that the state will in the coming years, despite the willingness of the authorities to take measures to achieve further, gradual fiscal consolidation , will continue to face liquidity pressures. ”it added.

Even though Moody’s included the potential funding flows from a possible IMF program in its analysis of El Salvador’s funding prospects for 2022, the rating agency believed that even if an agreement with the IMF on a funding program was reached, problems would arise with the state’s high cost of funding are unlikely to be fully covered by official funding flows.

The other cause of the rating downgrade is a deterioration in the quality of policy making, which has increased the implementation risks for the authorities’ fiscal adjustment plans and uncertainty about funding prospects.

According to the IMF, some policy decisions reflect weakened governance in El Salvador, exacerbating tensions with international partners – including the US – and jeopardizing progress towards an agreement with the Fund.

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