Israel is at war with debt..$6 billion from overseas. Will it be okay as it is?

Amid ongoing conflict between Israel and Palestinian Islamic group Hamas, Palestinians are fleeing north of the Gaza Strip to the south on May 18th (local time). /Reuters Yonhap News

Reports have surfaced that the Israeli government has raised trillions of won for the war against the armed Palestinian faction Hamas, by issuing bonds at excessive costs.

According to the Financial Times (FT) on May 18th (local time), Israel has raised more than $6 billion (about 7.8 trillion won) from international investors since Hamas’ surprise attack on the 7th of last month. They raised $5.1 billion through three new bond issues and six additional issues of existing dollar and euro-denominated bonds. They also raised over $1 billion through U.S. corporations. FT reported that these bonds were sold to selected investors in private placements, and the transaction prices were not disclosed. However, banking officials reported that Israel had agreed to give a contracted interest rate of 6.25% for a four-year maturity bond and 6.5% for an eight-year maturity bond among the two dollar bonds issued this month. Considering that the yield on U.S. government bonds was 4.5~4.7% at the time of bond issuance, it appears that Israel raised funds at excessively high interest rates. The higher the issuance rate, the higher Israel’s borrowing costs.

The investment industry has taken note of the fact that this fundraising was conducted through private placements, not public offerings. Currently, Israel is facing severe criticism for ‘anti-humanitarian’ actions, including bombing hospitals, after entering ground warfare in the Gaza Strip. In such a situation, there is bound to be a limit to attracting investors if bonds are issued through public offerings, conscious of criticism for ‘providing war funds’. They sold bonds in the form of private placements in order to raise money as quickly and inconspicuously as possible. This transaction was facilitated by Goldman Sachs and Bank of America.

The prolongation of the war is heightening concerns about Israel’s already deteriorating economy. Global investment bank JP Morgan predicted that Israel’s fiscal deficit could grow larger than expected, and the ratio of government debt to gross domestic product (GDP) could rise from 57.4% before the war to 63% by the end of next year. The Bank of Israel also lowered its forecast for this year’s economic growth rate from 3% to 2.3%. Some predict that Israel could incur additional debts of several billion dollars for recovery support and other purposes after the war.