The Banking Supervision Authority, affiliated with the Central Bank of Israel, asked banks and credit card companies to respond to an “extreme” scenario for conducting stress tests, if the war on Gaza expands to include the Lebanon front.
According to the scenario prepared by the Central Bank last April, the expansion of the war will be accompanied by a sharp and immediate jump in the yield on 10-year Israeli government bonds, Israel’s credit rating will be lowered, and interest rates will be raised sharply, with an increase in the risk premium being reflected. In the form of a rapid eater of public financial assets, including stocks and corporate bonds.
The repercussions of expanding the war
According to the Israeli Central Bank’s scenario, the expansion of the war will lead to a rise in the yield on Israeli government bonds to 11.3% for 10 years, up from 4.3% currently, while the credit rating is likely to decline by 3 points.
Moody’s lowered Israel’s credit rating last February to “A2” with a negative outlook, and Standard & Poor’s followed suit in lowering the rating by one notch from “AA-” (-AA) to “A+” ( +A), and she said, “The outlook remains negative.”
It is noteworthy that there will be changes in Israel’s public finances if it expands the war to the northern front against Hezbollah, according to what Globes newspaper indicated last week.
The newspaper indicated that the Ministry of Finance in Israel put forward a proposal that includes a comprehensive reduction in ministries’ expenditures in next year’s budget by 5%, amounting to 3.5 billion shekels ($940.2 million), to confront military expenditures.
This is one of several measures proposed by the Ministry’s Budget Department, which aims to reduce next year’s expected fiscal deficit by about 3.8% of GDP.
The Budgets Department in the Ministry of Finance prepared a list of possible amendments with a total value of up to 50 billion shekels ($13.43 billion), according to what the newspaper quoted an unnamed source in the Ministry of Finance.
Procedures proposed
Among other proposals presented:
- Reducing the salaries of senior managers in the public sector.
- Postponing the next batch of pay increases in the civil service.
- Reducing allocations to the coalition parties (the parties forming the government), by between 2 and 4 billion shekels ($534.2 million and $1 billion).
- Abolition of unnecessary ministries.
- Raising the value-added tax rate to 19% (it is scheduled to be raised from the current 17% to 18%).
However, the sources suggested that this step would remain a precaution in the event that the confrontations in the north with Hezbollah develop into a comprehensive war, which requires immediate sources of funding.
