"Israel War, Actually Funded by Debt"... Raised 7.8 Trillion Won Overseas

Dollar Bond Issuance Interest Rate 6.25~6.5%
Burden of Rising Funding Costs Amid Economic Deterioration

Israel, engaged in a war with the Palestinian armed group Hamas, has reportedly been raising war funds by borrowing money overseas.

The British daily Financial Times (FT) reported on the 18th (local time) that the Israeli government has raised more than $6 billion (approximately 7.8 trillion won) from international investors since Hamas's surprise attack on October 7.

This includes $5.1 billion raised through three new bond issuances and six additional issuances of existing dollar- and euro-denominated bonds, as well as over $1 billion raised through a U.S. corporation.

Smoke Rising in Northern Gaza Strip Due to Israeli Airstrikes
Photo by Yonhap News

These bonds were sold privately to selected investors, and the transaction prices were not disclosed. However, rumors among U.S. bankers suggest that for the two dollar bonds Israel issued this month, the 4-year maturity bond carries a coupon rate of 6.25%, and the 8-year maturity bond carries a coupon rate of 6.5%.

This interest rate is significantly higher than the U.S. Treasury yields of 4.5?4.7% at the time of issuance, indicating that Israel’s borrowing costs are considerably high.

There is controversy in the bond market regarding Israel’s bond issuance to finance the war.

Some U.S. investors want to lend money to Israel, which was attacked by Hamas. However, considering the humanitarian costs caused by the Israeli military’s invasion of the Palestinian Gaza Strip, there are views that Israel’s fundraising is a repugnant act.

Additionally, some investors and analysts have noted that Israel’s bond issuance was conducted privately rather than through a public offering. It is analyzed that this may be an attempt to quickly raise war funds or to avoid attracting attention.

Tis Low, a fund manager at global asset management firm Ninety One, pointed out, "From many investors’ perspectives, Israel currently carries too many ESG (Environmental, Social, and Governance) risks."

Concerns about Israeli bonds have led to a sharp increase in insurance costs against default, namely a surge in credit default swap (CDS) premiums.

The CDS premium for Israeli bonds (5-year maturity) surged from below 60 basis points (1bp = 0.01 percentage points) in early October to 125bp on the 17th of this month. This is more than twice the 55bp CDS premium for Saudi Arabia, which has a lower credit rating assigned by international credit rating agency S&P.

Investors have noted that Israeli bonds, with an S&P credit rating of AA minus, are trading much cheaper compared to bonds of countries with similar credit ratings such as South Korea.

Residents of Gaza Strip escaping from a collapsed building [Photo by Yonhap News]

According to the report, an investment strategist at a global investment bank said, "The market is worried about how this war will affect Israel’s growth, public debt levels, and consequently its sovereign credit rating."

Daniel Nave, CEO of Israel Bonds, a U.S.-based company that underwrites Israeli government bonds, said, "The Israeli Ministry of Finance may borrow tens of billions of dollars more to carry out special missions (such as reconstruction support) after the war."

Meanwhile, Israel’s national debt has increased by 300 billion shekels (approximately 10.3 trillion won) following the war with Hamas. The Israeli Ministry of Finance stated that just over half of this amount, 160 billion shekels (about 5.5 trillion won), is dollar-denominated debt raised in international markets.

Since Hamas’s surprise attack on Israel on October 7, Israel has spent heavily on military support, compensation for victims and families of abductees, and businesses near the border. Meanwhile, tax revenues have decreased during this period. As a result, Israel recorded a fiscal deficit of 22.9 billion shekels (about 8 trillion won) last month. In September, it had a deficit of 4.6 billion shekels (about 1.6 trillion won).

This content was produced with the assistance of AI translation services.