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Morgan Stanley Bullish On El Salvador Bonds

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Morgan Stanley has made public that El Salvador’s debt has been “excessively punished” by the markets as it’s trading at a 70% discount from the last top. The bonds could rebound 44 cents on the dollar by the end of this year.

Morgan Stanley, a global leader in financial services, has recently shared that it’s on the lookout to pick up El Salvador’s battered bonds. After credit rating agencies and money managers have lost trust, the bonds have been on a steady decline.

Simon Waever, global head of emerging market sovereign credit strategy at Morgan Stanley had share a note saying:

“Markets are clearly pricing in a high probability of the autarky scenario in which El Salvador defaults, but there is no restructuring.”

The government’s $7.7 billion in Eurobonds were “excessively punished” by the market, which seems inaccurate, as El Salvador is in a much better economic position than other distressed ‘third world countries’ according to Waever.

“Markets are clearly pricing in a high probability of the autarky scenario in which El Salvador defaults, but there is no restructuring,” he wrote.

El Salvador’s 2027 bond fell from 32 cents on the dollar to 28 cents this year.

Waever estimates that the debt should trade at about 43.7 cents on the dollar even if the country heads into default, although he admits it is unlikely to reach that level soon, as global liquidity is tight.

The calculations do not take into account an $800 million debt maturing in January 2023, which trades much higher (65 cents on the dollar).

In Waever’s words, El Salvador could prevail without defaulting for at least another year, as it has a primary surplus and its maturities are lower than those of other countries in difficulty, such as Argentina, Egypt, and Ukraine.

The pessimism shown by the market regarding El Salvador has been attributed to the unpredictable policies of the Salvadoran president, from the dismissal of some of the country’s top judges, accused of working in conjunction with some of the local gangs, to the conversion of bitcoin into legal tender and the recent announcement of a failed dollar bond sale linked to the token.

To this must be added that since November last year when bitcoin peaked, it has lost almost a third of its value, causing losses of around 48% along the way with Bukele’s bet on bitcoin, which began in September 2021. The nation currently holds about $56 million in bitcoin, which is waiting to appreciate again when the bitcoin price returns to the levels it reached last year.

On the other hand, these policies have also weighed on the country’s talks with the International Monetary Fund.

“For a restructuring to work, it is almost always necessary for the IMF to be involved or for there to be a clear push for reform by the government,” Waever wrote. “Given that this may not be the scenario for a possible restructuring, it could easily end up being a protracted negotiation.”

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