Israel government debt risk drops

Credit-default swaps on Israel tumbled 45 basis points last week to 130 basis points.

The cost of hedging against losses on Israeli government debt fell to the lowest since October as signs increased the economy may be emerging from a recession, Bloomberg reports.

Credit-default swaps on Israel tumbled 45 basis points last week to 130 basis points, the lowest since Oct. 3, according to CMA DataVision prices at the close of trading July 24. The Bank of Israel said July 19 that the countrys leading economic indicators rose for the first time in a year.

The data is showing some real turn-around in the Israeli economy and that is fueling the spike in confidence, Shlomo Maoz, chief economist at Excellence Nessuah Investment House Ltd. in Tel Aviv, said. Economic growth will resume this year on the positive outlook for exports and world trade.

Israels economy has weathered the worst of the global economic slump and growth is likely to resume by the end of 2009 or the beginning of next year, Bank of Israel Governor Stanley Fischer said on July 2. Fischer, who decides on interest rates today, may say how he intends to withdraw money added to the economy to ease the credit crunch, Shahin Vallee, an emerging- market currency strategist at BNP Paribas in London, said.

The central bank has cut rates by 3.75 percentage points since October to a record low of 0.5 percent as it sought to revive an economy that shrank 3.9 percent in the first quarter. The bank has also purchased foreign currency since March 2008 to help weaken the shekel and bought government bonds since Feb. 17 in an effort to push down yields.

Rates unchanged

The Bank of Israel will probably keep its benchmark rate unchanged today, according to all but one of 11 economists surveyed by Bloomberg. One predicted an increase to 0.75 percent. The decision will be released after the markets close, followed by a statement from Fischer.

The tone of the statement will be scrutinized to assess how quickly the bank is likely to start raising rates in addition to the banks exit from the regular foreign exchange and security purchases, Caroline Grady, an economist at Deutsche Bank AG in London, said in an email.

Speculation Israels credit rating will be raised also boosted confidence in the countrys debt, said Maoz.

I expect Moodys or Fitch to raise Israels outlook and/or rating, he said.

Delegations from Moodys Investors Service and Standard & Poors have visited Israel and Fitch representatives arrived July 20, according to an e-mailed statement from the Finance Ministry. S&P affirmed Israels ratings on July 17 and said the outlook remains stable.

Last weeks 23 percent drop in credit default swaps was the biggest weekly decline since the last week of October. The price on contracts has halved from a peak of 285 basis points in February.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improvement in perceptions of credit quality. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Published by Globes [online], Israel business news - www.globes.co.il - on July 29, 2009

 
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