Israel Prepares for Bond Spree to Finance War Against Hamas

Israel braces for bond issuance surge to fund ongoing conflict with Hamas amid credit downgrade. Stay updated on the latest developments.

Feb 11, 2024 - 07:42
Feb 11, 2024 - 07:42
Israel Prepares for Bond Spree to Finance War Against Hamas
Israel Prepares for Bond Spree to Finance War Against Hamas

Israel is gearing up to issue a significant amount of bonds this year to fund its ongoing conflict with Hamas, according to sources within the finance ministry.

The task has become more challenging following Israel's credit rating downgrade on Friday, marking the first downgrade in its history. Moody’s Investors Service lowered the government's rating to A2, emphasizing the economic strain caused by the ongoing conflict.

The government is expected to heavily rely on the shekel bond market for increased issuance, as well as pursue more foreign-currency bonds through private placements.

Pressure is mounting on Israel, including from the US, to de-escalate its operations in Gaza and alleviate the plight of Palestinian civilians. However, the conflict persists, with the Israeli military estimating that it may take until next year to achieve its objectives.

Moody’s downgrade highlighted the significant political and fiscal risks posed by the conflict, projecting a higher debt burden for Israel than previously anticipated.

As the financial costs escalate, Israel is on track to run one of its largest budget deficits in recent history. The government plans to raise more debt in 2024 than in any other year except 2020, when it grappled with the economic fallout from the COVID-19 pandemic.

Private sector analysts estimate total debt issuance to reach approximately 210 billion shekels ($58 billion) in 2024, a substantial increase from previous years.

The bulk of this issuance will target the domestic market, leveraging Israeli pension funds and institutional investors to mitigate reliance on volatile foreign capital flows.

Despite the economic challenges, investors remain optimistic about Israel's financial outlook, buoyed by recent discussions and meetings in the US and other countries.

While Israel has refrained from issuing foreign-currency bonds in public markets since the start of the conflict, it has pursued private placements in dollars, euros, and yen through arrangements with investment banks.

These private placements, which include recent deals arranged by institutions such as Goldman Sachs and Deutsche Bank, have provided a source of foreign borrowing amid the ongoing conflict.

Despite the economic strains, Israel's markets have stabilized in recent weeks, with policymakers even implementing interest rate cuts. However, the government faces the daunting task of financing a war bill estimated to exceed $70 billion over the next few years.

Investors will closely monitor Israel's budget for 2024, awaiting its approval in parliament later this month. The budget projects a fiscal deficit of 6.6% of GDP, reflecting the significant increase in government spending amidst the conflict.

While the Moody's downgrade may have a limited impact on global markets, some investors remain cautious, evidenced by the increased cost of insuring against an Israeli default compared to lower-rated sovereigns.

Prime Minister Benjamin Netanyahu has expressed confidence in Israel's economy, attributing the rating downgrade to the ongoing conflict and asserting that the rating will rebound once the conflict is resolved.

Also Read: Israeli Banks Comply with US Sanctions on West Bank Settlers, Drawing Opposition from Far-Right Ministers

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