Mar 22, 2023
Israeli Bond Market Puts a Price on Netanyahu’s Judicial Revamp
For months, critics of Israeli Prime Minister Benjamin Netanyahu have been warning that his proposals to overhaul the judicial system could put Israel’s A+ credit rating at risk.
Pricing in debt markets suggests it’s already been kicked down a notch by investors.
The extra yield that bond buyers demand to hold Israel’s 10-year debt over comparable US Treasuries was 28 basis points as of Tuesday, the highest in three years. The premium is even more significant because for most of that time period, the spread was negative, meaning investors demanded more to own the US government’s debt than they did to hold Israeli debt in shekels. Not anymore.
That’s a blow to a country long regarded as a relatively safe bet for investors due to its consistent current-account surplus and thriving technology industry. The shekel is one of only two major world currencies to hold value against the dollar over the past decade, along with the Swiss franc, and through wars, conflicts and global economic crises, Israel has never been downgraded by any of the major rating companies. But the political turmoil is shaking confidence.
The repricing in markets means Israel already has one of the steepest borrowing costs among highly rated investment-grade countries, and pays more than lower-rated nations including Portugal and Thailand. The cost to insure Israeli debt against default has spiked, rising 30 basis points since end-December to 70 earlier this week. It traded at around 64 basis points in London on Wednesday, higher than lower-rated Slovenia and Spain.
“There is a reasonable chance Israel’s sovereign credit rating can be lowered by one notch in the coming months,” said Brendan McKenna, a strategist at Wells Fargo & Co. in New York. “In the short-term, I think the local and foreign-currency debt can stay under pressure as uncertainty around local politics persists.”
Netanyahu’s efforts to wrest more power away from Israel’s courts have brought tens of thousands of Israelis onto the streets for twice-weekly protests. Among them are prominent figures from Israel’s high-tech and financial sectors, who’ve warned that the measures threaten Israel’s democracy, as well as its ability to attract and keep both talent and capital.
Moody’s Investors Service and Fitch Ratings warned this month of risks to Israel’s debt rating and economic prospects from the changes. Both credit assessors assign the fifth-highest grade ratings to the country.
While the capital flight and brain drain that Netanyahu’s opponents have been warning of doesn’t seem to be occurring yet, that doesn’t mean it won’t, said Shmuel Chafets, founder of Target Global, an investor in Israeli tech.
“Money is leaving now in modest amounts but that could snowball if this goes on long enough,” he said.
The rapid collapse of Silicon Valley Bank earlier this month shook Israel’s vaunted tech community, not only because it was the go-to bank for many of the country’s startups, but also because of what it may mean for funding across the sector more broadly. Technology is responsible for 15% of Israel’s economic output, about half of its exports, and the sector’s workers pay a quarter of all the nation’s income taxes.
The bank’s unraveling also showed how easily years of apparent success can be undone, according to Nadav Lidor, general manager of Brex Israel, a financial services technology company.
“SVB is really worrying for the Israeli ecosystem, but the judicial reform is by far the greatest threat,” he said.
Such concerns are denting confidence in the currency, too, with the shekel languishing near a three-year low. Given its high correlation with US stocks, turmoil across markets could also add more pressure, Bank of America Corp. strategists Mikhail Liluashvili and Mai Doan said in a note at the end of last week.
n Tuesday, derivatives traders were the most bearish on the shekel since October, according to one-month risk reversals.
“We are in a big storm worldwide, and this is a local tornado in a global storm,” said Roy Heldshtein, chief operating officer at the venture capital firm Team8 in Tel Aviv.
--With assistance from Alisa Odenheimer.
(Updates prices in fifth paragraph.)
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