(Refiles to correct third paragraph by adding dropped word "bitcoin")
By Nelson Renteria
SAN SALVADOR (Reuters) - El Salvador will dedicate $560 million in funds to a surprise bond buyback plan, its finance minister said on Wednesday, as the impoverished country looks to ease worries about the state of its public finances.
El Salvador's president Nayib Bukele announced the voluntary bond repurchase offer on Tuesday, supported by funds allocated last year by the International Monetary Fund and a loan from a Central American multilateral lender.
Bukele, who last year championed the country's adoption of the cryptocurrency bitcoin as legal tender alongside the U.S. dollar, faces growing pressure to demonstrate healthy finances as El Salvador's options dwindle ahead of an $800 million bond maturity early next year.
Finance Minister Alejandro Zelaya told local broadcaster TCS that $560 million the country has available could be used to buy some but not all 2023 and 2025 sovereign bonds, whose maturities total some $1.6 billion.
The debt buyback scheme marks an attempt to demonstrate sound finances despite high inflation, costly fuel subsidies plus losses stemming from Bukele's bitcoin gambit.
"We are not going to buy the total debt. If we buy it, we will also buy it at a discount. And we're not going to spend more than we have in the bank," the minister said.
"To pretend that we are going to have all the money to buy all the debt is to believe that we have a magic wand to solve the country's fiscal problems," he said, describing the bond buybacks as a first step.
Salvadoran bond spreads to U.S. Treasuries tightened sharply on Wednesday but remained in very distressed territory.
The debt included in the offer saw the largest gains in price with the 2023 bond rising 12 cents to $0.86 and the 2025 bond up nearly 13 cents to $0.47, according to Refinitiv data.
Morgan Stanley said in a Wednesday research note that if confirmed, the buyback "would clearly demonstrate the willingness to pay."
"Given that the key worry in the market has been around the willingness to pay as opposed to the ability, this transaction would ease those worries significantly," the bank's analysts said, adding there is no guarantee the buyback offer will happen.
(The story refiles to correct third paragraph by adding dropped word "bitcoin".)
(Reporting by Nelson Renteria in San Salvador; Additional reporting by Rodrigo Campos in New York; Writing by Carolina Pulice; Editing by David Alire Garcia and Richard Pullin)