The global perception of the current local events in Israel
In the context of the current Israeli political and social quagmire, many Israeli investors have shared with us their fear and concerns about (a) the financial stability of the State of Israel, (b) the creditworthiness of its banking institutions, and (c) the rapid fall of the shekel and the local bond and equity markets.
In this first of a series of 3 emails, I have chosen to initiate my analysis by addressing what I think is the most pressing issue: the globally perceived financial stability of the State of Israel. My analysis is not meant to be a political view but rather a reflection of the global markets’ reaction to the local Israeli events.
In a conclusion, I currently would qualify the perceived worsening of the financial stability of the State of Israel by global institutional lenders as mild and contained. Of course, we are proactively monitoring the situation and adapting portfolios, and we are always looking forward to personally addressing your concerns and offering our solutions.
Section 1: Introduction and background
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In the context of the current Israeli political and social quagmire, many Israeli investors have shared with us their fear and concerns about (a) the financial stability of the State of Israel, (b) the creditworthiness of its banking institutions and (c) the rapid fall of the shekel and the local bond and equity markets.
In this first of a series of 3 emails, I have chosen to initiate my analysis by addressing what I think is the most pressing issue: the globally perceived financial stability of the State of Israel. My analysis is not meant to be a political view but rather a reflection of the global market’s reaction to the local Israeli events.
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I have chosen to analyze this “fear” by examining the insurance premium a global institutional lender would have to pay to protect its investments against an event where the State of Israel would refuse to pay – and thereby would default on - its international obligations.
The market where these insurance premia are traded on a “live” basis is the global Credit Default Swap market (the CDS market). The CDS market also allows these global institutional lenders to express their views about the short-, medium- and long-term creditworthiness of borrowers.
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Section 2: Analysis
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Since the beginning of the current political quagmire - which I trace back to the first weeks of the year 2023 – the global CDS market is conveying 3 messages about of the perceived risk of default of the State of Israel:
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2.1-???????????Compared to the beginning of the year 2023, international Institutional lenders are truly – albeit marginally - more worried about the financial stability of the State of Israel.
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2.2-???????????Compared to the beginning of the year 2023, there still is very little perception of any clear and present danger of a default of the State of Israel on its international financial obligations.
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Indeed, an international Institutional lender wanting to purchase insurance against a bankruptcy of the State of Israel must pay a larger annual insurance premium to insure his loans and bonds against a longer-term default risk of the State of Israel than to insure them against a shorter-term default risk.
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For instance, where an international Institutional lender needs to pay an annual 0.34% insurance premium to hedge a 2-year default risk of the State of Israel, it must pay a more significant annual 0.53% insurance premium to hedge a 5-year bankruptcy risk of the State of Israel.
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This so-called “upward sloping” feature of the State of Israel US Dollar credit insurance “curve” is typical of a market perception of very little fear of any clear and present danger of an immediate bankruptcy risk of a borrower.
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A quick remark for CDS specialists: I do not read any special message from the fact that the State of Israel's forward CDS curve is steeper than its spot curve. It is also the case for any upward-sloping CDS curve.
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3.??????From a historical perspective, the fear of bankruptcy of the State of Israel has already been more acute in the past:
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For instance, the 5-year US Dollar State of Israel CDS used to trade at an annual 2.75% premium back in 2008 (during the Global Financial Crisis), an annual 2.00% premium back in 2012 (during the so-called European “PIIGS” crisis) and annual 0.75% premium (at the peak of the Corona Pandemic).
Finally, and to put things in perspective, it currently costs an annual 5.65% insurance premium (respectively?1.75%) to insure one’s bonds and loans against the default risk of the Republic of Turkey (respectively Hungary) over the next 5 years.
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Section 3: Conclusion
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In a conclusion, I currently would qualify the perceived worsening of the financial stability of the State of Israel by global institutional lenders as mild and contained. Of course, we are proactively monitoring the situation and adapting portfolios, and we are always looking forward to personally addressing your concerns and offering our solutions.
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Looking forward
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In the next email - which requires more data points from the global basis-swap market - I will address the perceived change in the credit quality of Israeli banking institutions which has also been a concern for some investors.
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