In the aftermath of the government's decision to raise the deficit target, and warnings against the move by Ministry of Finance officials, Governor of the Bank of Israel Prof. Stanley Fischer, and Prof. Manuel Trajtenberg, Financial Immunities Ltd. CEO Adam Reuter has analyzed the repercussions of the decision for Israel's credit rating and government bond yields. "It is now clear that the government is going to increase its debt instead of raising taxes. Two questions arise: Will Israel's credit rating be harmed, and how will it affect long-term bonds?" he told "Globes".
"Is a modest increase in Israel's debt-to-GDP ratio a problem? Happily, we are not far from the OECD average. The average debt-to-GDP ratio in the OECD is 68%, and Israel's ratio is 74%," Reuter says.
Reuter notes that in light of the fact that many OECD countries have higher debt-to-GDP ratios than Israel, including Japan (220%), the US (103%), and Greece (165%). Israel is in fairly good shape.
"The EU debt-to-GDP ratio is 83%. Canada also has a ratio of 83%, and Germany has 82%. In view of this, Israel, with a debt-to-GDP ratio of 74%, can increase its debt without this affecting its credit rating," Reuter concludes.
Reuter says that increasing the government deficit by increasing the debt will raise the country's debt-to-GDP ratio by just 1-1.5% to 75% at the most.
As for the effect on long-term government bonds, Reuter says, "I believe that the effect on the bond market, especially on long-term bonds, will be quite modest, because institutions in Israel are currently in defensive mode, hunkering down more and more with safe assets in the form of Israeli government bonds, at the expense of corporate bonds, and there will be strong demand for these goods."
"It is also important to state that increasing the debt is excellent in view of the very low prevailing interest rate in Israel and abroad," Reuter added,.
Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2012
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