Crypto crash forces El Salvador into China's economic circle of influence
El Salvador President Nayib Bukele during a December, 2019 visit to China
Fourteen months after El Salvador became the first nation to adopt bitcoin as a legal tender, the bankruptcy of cryptocurrency exchange FTX and resulting crash in prices of other cryptocurrencies have pushed the country's leaders to announce the signing of a free trade deal with China.
El Salvador Vice President Félix Ulloa said that China had offered to buy country's $21 billion in foreign debt as part of free trade deal.
WATCH |World Business Watch | El Salvador's bitcoin experiment: $60 million lost
As for conventional legal tender, the country had adopted US dollar as national currency in 2001. However, Salvadoran economists say that the debt financing from China would mean a definitive break from the US and move the country closer to China, Russia and Turkey.
China-El Salvador ties: On rise since 2018
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In 2018, El Salvador ended its relationship with Taiwan. Following the strategically significant move in Beijing's favour, the Chinese agreed to build a stadium and a library in the country of 6.5 million people. Beijing also plans to convert the port of La Union into a logistics hub.
China-El Salvador trade deal: A compulsion for President Bukele
El Salvador has to pay €667m ($688m) for a Eurobond amortisation by January next year. Amortisation refers to the process of reducing or paying off a debt with regular payments. President Nayib Bukele had announced in the beginning of 2022 that the country would issue bitcoin-denominated bonds to pay off national debt. The President had famously forecasted that the price of bitcoin would reach $100,000.
However, the recent crypto crash has thrown President's Bukele's hopes of crypto-based rescue of country's economy into disarray. The bitcoin price currently hovers around $16,000.
ALSO READ |Bitcoin plunges, records the fifth-biggest collapse in financial history
Experts also say that the debt-financing from China doesn't come cheap.
“China acts as a payday lender, they make good money off of these deals,” Evan Ellis, a senior associate at the Washington DC based Centre for Strategic & International Studies was quoted as saying by The Guardian. “But they often find a way to tie the loans to long-term commercial and strategic benefits opening the way for Chinese companies.”
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