Reports have emerged that Israel, currently at war with the Palestinian armed faction Hamas, is raising war funds by borrowing from abroad.
The Financial Times (FT) reported on the 18th (local time) that the Israeli government has raised over $6 billion (approximately 7.8 trillion won) from international investors since being ambushed by Hamas on the 7th of last month.
This includes $5.1 billion raised through the issuance of three new bonds and the additional issuance of six existing dollar and euro-denominated bonds, as well as over $1 billion raised through U.S. corporations.
These bonds were sold to selected investors in a private placement, and the transaction prices were not disclosed. However, rumors are circulating in U.S. banking circles that Israel has agreed to pay interest rates of 6.25% on a four-year bond and 6.5% on an eight-year bond issued this month.
These interest rates are much higher than the U.S. Treasury yield of 4.5-4.7% at the time of bond issuance, indicating that Israel’s borrowing costs are correspondingly high.
There is controversy in the bond market over Israel’s bond issuance to raise war funds.
Some U.S. investors want to lend money to Israel, which has been attacked by Hamas. However, there are also views that Israel’s fundraising is abhorrent, considering the humanitarian costs of the Israeli military’s invasion of the Palestinian Gaza Strip.
Some investors and analysts have noted that Israel’s bond issuance was done through private placement rather than public offering. They speculated this could be an attempt to quickly raise war funds or avoid drawing attention.
Ties Rouw, a fund manager at global asset management firm Ninety One, pointed out that “from the perspective of many investors, the reality is that Israel is currently carrying too much ESG (Environmental, Social, and Governance) risk.”
The wariness towards Israeli bonds is leading to a surge in the cost of insurance against default, i.e., a sharp rise in Credit Default Swap (CDS) premiums.
The CDS premium (based on a five-year maturity) of Israeli bonds has skyrocketed from less than 60 basis points (1bp=0.01 point) in early October to 125 basis points on the 17th of this month. This is more than double the 55 basis points for five-year CDS premiums for Saudi Arabia, which has a lower credit rating assigned by international credit rating agency S&P.
Investors have noted that Israeli bonds, which have an S&P credit rating of AA minus, are trading much cheaper compared to bonds from countries with similar credit ratings, such as South Korea.
According to the report, a strategist at a global investment bank said, “The market is worried about the impact of this war on Israel’s growth, public debt level, and the resulting national credit rating.”
Dani Nave, CEO of ‘Israel Bonds’, an Israeli government bond underwriting company based in the U.S., said, “The Israeli Ministry of Finance could take on tens of billions of dollars in additional debt to carry out special tasks (such as supporting reconstruction) after the war.”
Meanwhile, Israel’s national debt has increased by 30 billion shekels (approximately 10.3 trillion won) after the war with the Palestinian armed faction Hamas. The Israeli Ministry of Finance explained that slightly more than half of this, 16 billion shekels (approximately 5.5 trillion won), is dollar-denominated debt raised from international markets.
Since Hamas ambushed Israel on the 7th of last month, Israel has spent heavily on military support, compensation for victims and kidnapped victims’ families, and businesses near the border. Meanwhile, tax revenues have decreased during this period. As a result, Israel recorded a fiscal deficit of 229 billion shekels (approximately 8 trillion won) last month. This is a significant increase from the 46 billion shekel (approximately 1.6 trillion won) deficit recorded in September.
By reporter Kim Eun-ha galaxy656574@asiae.co.kr
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