The Ministry of Finance capital market division has decided to encourage insurance insurance companies to change from investing their reserves in designated bonds to long-term investment in the capital market. In an initial, limited move, the Ministry of Finance is seeking to redeem designated bonds held by insurance companies totaling NIS 400 million. Ministry of Finance Budgets Commissioner David Milgrom made an announcement to this effect today to the Knesset Finance Committee.
Milgrom announced that redemption of the bonds would be by a closed tender, limited in size, that would be offered to insurance companies, with a lower minimum interest rate than determined by the market. The market interest rate in this case was set at the rate set for long-term government bonds a week before the tender. The company bidding the highest rate will win the tender.
In his announcement to the Finance Committee, Milgrom noted that the new move was part of the Ministry of Finance's economic policy of releasing long-term financial sources on the capital market. He said that the state has a clear interest in implementing the move, which turns non-negotiable debt into negotiable debt. The significance of the move lies in the fact that the state can change the debt's duration according to changing considerations, such as the interest rate, the budget deficit and the domestic debt turnover.
Milgrom said there were consequences and implications attached to the move in the insurance sector, in that it relayed a message to other institutional investors regarding the conversion of designated bonds. He said he hoped the success of the move among insurance companies would advance a similar move in pension funds.
Milgrom said utilization of the possibility of getting out of designated bonds would prove professional maturity in risk taking by the insurance sector, which would have a stabilizing effect on the capital market and great economic value, the fruits of which would be seen in the future.
Published by Israel's Business Arena on September 13, 1999