‘Israel will escape short-term damage’

Israel is protected from effects of US credit-rating downgrade because about 70 percent of government debt is domestically funded.

By NADAV SHEMER
August 7, 2011 22:52
3 minute read.
Netanyahu speaks to US Congress

US Congress. (photo credit: courtesy)

Standard & Poor’s unprecedented downgrading of the United States’s credit rating means the world has lost its benchmark, yet the immediate direct impact on Israel will be negligible, a local expert told The Jerusalem Post Sunday.

Dr. Nadine Baudot-Trajtenberg, head of the MBA program at IDC Herzliya’s Arison School of Business, said Israel would be well-protected because about 70 percent of its government debt is domestically funded.

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“By and large it’s a domestic market,” she said. “They are domestic players, they buy domestic debt, and they’re very unlikely to be influenced by whatever downgrading or upgrading [there is] of any other country, including the United States.”

Of the portion of Israeli government debt that is funded abroad, about 10% comes from US guarantees, Baudot-Trajtenberg said.

“The initial amount was close to $10 billion, and whatever we’ve already used, Israel has benefited from the AAA rating of the United States,” she said, adding: “But there’s a part of these US guarantees that the Israeli government has not used yet, and I think this amounts to something like $3.5 billion. And this means that were the government to try to fund itself by using those guarantees, it would now no longer have the guarantee of a AAA rating, but of a AA+.”

“Now, how much does that mean for the Israeli government?” Baudot-Trajtenberg said. “I don’t think it means a lot, for a series of reasons.

First of all, we’re talking about $3.5 billion out of a total debt of $162 billion, so we’re not talking about a large amount of money. And we’re talking about a downgrade from a AAA to a AA+, which I assume the market will give just a little downgrade.”

The remaining guarantees would be funded at a rate of 3.8% instead of 3.5%, she said, so that “overall it would cost the Israeli government something like $10 million.”

Another advantage enjoyed by Israel is its foreign-account surplus, Baudot-Trajtenberg said.

“The timing of this is hugely important,” she said. “Had this occurred 10 years ago, the potential it would have had for dramatic impact on Israel would have been much larger. [But] it’s happening at a time when Israel’s net foreign debt is positive, meaning that Israel is a lender to the rest of the world, we still have a current-account surplus, the need for foreign funding is not very large, and therefore the trouble on foreign markets is not going to impact Israel as much.”

From a broader perspective, “the world has now lost its benchmark,” Baudot-Trajtenberg said, and this could have geopolitical consequences for Israel.

“Israel is still in great need of the friendship of the United States,” she said. “Things are going to happen in a month from now in the region [with the Palestinian bid for statehood at the United Nations]. We’re not sure how this will translate, how this will be perceived by markets. So it can have an impact, but it’s much more difficult to put a finger on bigger changes.”

If anything, Baudot-Trajtenberg said, the loss of the US as the benchmark would have much more of an effect on Saudi Arabia and other Middle Eastern oil-producing countries, who are heavily invested in US government debt.

In addition, volatility in global markets will continue, she said.

“The loss of the benchmark is an important thing… In 1971, when the dollar stopped being convertible to gold, we also lost a benchmark,” Baudot-Trajtenberg said. “Gold ceased to be our benchmark, and from then on we started having foreign-exchange volatility, and to a certain extent this is what we’re now going to be seeing.

Having lost our benchmark, what it will mean is that we will have more volatility in the stock and bond markets.”


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