The cost of insuring Israeli sovereign debt against default has reached its highest level since the start of the war on Gaza in October last year, data from Standard & Poor’s Global Market Intelligence showed on Monday.
This came, according to the agency’s data, amid growing fears that tensions between Israel and the Lebanese Hezbollah could turn into a regional war in the near future.
The cost of five-year credit default swaps reached 149 basis points compared to last Friday’s close of 146 basis points, the highest price since October last year.
The Israeli army launched the largest wave of air strikes in terms of scope against Hezbollah, raising fears of an escalation and expansion of the confrontation.
The higher the number of points, the higher the cost of insuring sovereign debt, as it is linked to the political and economic situation of the country issuing the debt, and this paves the way for higher interest rates on Israeli sovereign loans, due to the high risks.
Since October 7, Israel has turned on more than one occasion to international debt markets to provide the cash liquidity needed to finance its war on the Gaza Strip and the tensions in the north with Hezbollah.
In all of 2023, the Israeli Finance Ministry said the country recorded new sovereign debt of 160 billion shekels ($43 billion), including 81 billion shekels ($21.6 billion) since the outbreak of the war, compared to $16.78 billion in 2022.
Budget deficit
Israel recorded a budget deficit of 12.1 billion shekels ($3.24 billion) in August, according to the Israeli Finance Ministry, which indicated that the deficit-to-GDP ratio rose during the 12 months through August to 8.3%, compared to 8% in July, and compared to a target of 6.6% for the whole of 2024.
Spending on the war in Gaza and its repercussions, which broke out last October, amounted to about 97 billion shekels ($26 billion).
In August, tax revenues grew by 8.1%, and by 1.9% during the first eight months of this year.
Credit rating downgrade
Last month, Fitch Ratings lowered Israel’s credit rating by one notch, from A+ to A, as the aggression on the Gaza Strip continues for its tenth month and its repercussions in the region.
Fitch said in a statement that the rating downgrade “reflects the impact of the ongoing war in Gaza, heightened geopolitical tensions and military operations on multiple fronts.”
The agency kept its outlook for the rating at negative, which means it could be lowered again.
The agency expected the budget deficit this year to reach about 7.8% of GDP, compared to the deficit targeted by the Ministry of Finance of 6.6%.
She explained that her expectations for the deficit during the coming year say that it “will reach 4.6%… but it may be higher if the war continues in 2025 and extends to other areas in the region.”
warning
This month, Israel’s budget commissioner, Yogav Gradus, warned of a further downgrade of Israel’s credit rating as a result of the government’s expanding spending limits without making appropriate cuts and adjustments to plug the growing budget deficit.
The Times of Israel quoted Gradus as saying that increasing budget spending could be dangerous for the economy and send a negative signal to investors.
He explained that the Israeli economy faces higher interest costs when borrowing to finance the inflated military and civilian expenditures after the war on the Gaza Strip; this is after the downgrading of Israel’s credit rating by the three major international credit rating agencies (Moody’s, Fitch, and Standard & Poor’s).
