Fitch Downgrades El Salvador Due to Bitcoin Adoption

El Salvador is facing a blow from a traditional financial firm over its "taboo" love of Bitcoin (BTC).

U.S. credit rating agency Fitch Ratings downgraded El Salvador’s long-term Issuer Default Rating (IDR) to CCC from B-, citing “policy unpredictability” and “adoption of Bitcoin as legal tender” as some of the factors leading to the downgrade.

Among other things, the statistical rating agency explained that reliance on short-term debt, a $800 million Eurobond payment due in January 2023, and a high fiscal deficit prevented the country from getting a better rating.

In addition, Fitch believes that El Salvador's increased short-term debt will weaken the government's ability to service its overall debt, which amplifies rollover risk. Fitch noted that nearly $1.3 billion in funding maturing in August, September and October will be even more difficult to deal with.

The country also faces heightened risks from "high and growing financing needs" in the coming years, Fitch said. The firm mentioned that El Salvador’s use of BTC as legal tender has led to uncertainty over potential plans by the International Monetary Fund (IMF) to provide the financing the country needs in 2022-2023.

El Salvador's rating could still be upgraded in time if it meets Fitch's criteria, including consistency in addressing debt problems through "unlocking predictable sources of financing" and fiscal adjustment focused on debt sustainability.

Meanwhile, El Salvador’s President Nayib Bukele recently predicted that a BTC price increase could be imminent. Citing the number of millionaires worldwide, the president said that if they decided to own at least 1 BTC, there would not be enough Bitcoin for everyone.

Back in January, Fitch Ratings issued a warning to energy suppliers across the United States about crypto miners. According to the company, not many states can meet the energy needs of the mining industry. The company added that mining operations are price sensitive and may shut down when profits fall.