Fitch downgrades El Salvador to CCC, moving the country to junk category

• El Salvador became the first country to adopt bitcoin as legal tender last year

• Fitch cut the nations credit rating, moving it to lower-than-investment-grade status

Fitch Ratings downgraded El Salvador's credit further into junk territory after the country adopted bitcoin as a legal tender. 

Fitch also said that its decision to cut the nation’s credit rating to CCC from B- was taken keeping the “heightened financing risks stemming from increased reliance on short-term debt,” ahead of an $800 million global bond payment due January 2023.

Last year, El Salvador, became the first country in the world to adopt Bitcoin as the official legal tender, three months after it passed the Bitcoin Law in the legislature.

The country developed Chivo, a digital wallet for individuals and businesses to transact, which will support the automatic liquidation of bitcoin transactions into dollars and withdrawals at bitcoin ATMs around the country.

Read more: Bitcoin drops 16% as El Salvador becomes first country to adopt crypto as legal tender

In its statement, Fitch wrote, “The weakening of institutions and concentration of power in the presidency has increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023.”

Moving past the warnings

Meanwhile credit rating agency, Moody's, warned last month El Salvador's default risk would increase if it keeps up its bitcoin buying.

In response to the credit agency’s warning, President Nayib Bukele, who has bought bitcoin on his phone with public funds, tweeted in a slang term, that the country doesn't care. He renamed the country 'El Hodlador' in a meme.

Bloomberg had earlier reported that El Salvador has about 1,391 bitcoins in its coffers and may have lost an estimated $10 million after bitcoin dropped to record lows this year. Amid the slump, Bukele said he "bought the dip," adding 410 bitcoins to El Salvador's stash for $15 million.

Also Read: El Salvador regulatory body to probe on government's Bitcoin purchases following complaints

With inputs from Fitch Ratings

Picture Credits: CNBC