Bloomberg News

Israel Debt Risker for First Time on Gaza Clash: Turkey Credit

November 15, 2012

Israel’s killing of the leader of Hamas’s military wing two days ago after rocket fire from Gaza catapulted its risk premium in credit markets above Turkey’s for the first time.

The cost of insuring Israeli debt using credit-default swaps reached 156 basis points yesterday, five basis points above that for Turkey, which was little changed. That reverses an eight-year trend, when Israeli swaps cost an average of 130 basis points less. In the summer of 2006, when Israel invaded Lebanon and went to war against Hezbollah, swaps on Israel cost an average of 198 basis points less than Turkey’s.

“Since 2006, spreads in Turkey are at about similar levels while CDS in Israel are a lot wider,” Arko Sen, a debt and currency strategist at Bank of America Merrill Lynch, said by e- mail from London yesterday. “Turkey’s credit ratings have been on a clear improving trend, while for Israel the arrival of the 2008-2009 financial crisis and then the Arab Spring in 2011 has led to a re-pricing of credit risk higher, and this is likely to remain the case given the ongoing tensions in the Middle East.”

Both countries are forcing investors to take account of geo-political risks. Israel faces attacks from armed groups in Lebanon and the Palestinian territories and the possibility of a nuclear-armed Iran, while Turkish Prime Minister Recep Tayyip Erdogan confronts an uprising by Kurdish militants in the southeast and has reinforced troop positions as fighting in Syria threatens to spill across the border.

‘Not Simple’

Still, this is the first time heightened risks for Israel have lowered its standing in credit markets against its one-time Muslim ally, with whom relations have soured during Erdogan’s 10 years in power.

The Israeli army said it called up reserves after the country’s jets struck the Gaza Strip this week, killing Ahmed al-Jabari, Hamas’s military chief. Defense Minister Ehud Barak said the fight against Hamas “will not be simple and may not be short,” according to an e-mail from his office yesterday.

The Israeli strikes followed a barrage of more than 115 rockets from Gaza into Israel this week, adding to a total of about 14,000 missiles fired from the territory in the past 11 years, according to the Israeli Defense Ministry. Hamas vowed to retaliate, and hit southern Israel with more than 200 rockets in the 24 hours after the strike, killing three people.

“Israel’s geopolitical risks have risen,” Tevfik Aksoy, chief emerging-market economist at Morgan Stanley in London, said in e-mailed comments yesterday. “Fundamentals are strong and this should keep the risk perception limited.”

Ratings Divergence

Investors use credit-default swaps to insure debt or to speculate on the riskiness of an issuer. Rising prices show deteriorating perceptions of a borrower’s credit worthiness and a higher perception of risk.

Israel is ranked investment grade by the three major ratings companies, with an A1 rating from Moody’s Investors Service, A+ from Standard & Poor’s and A from Fitch Ratings.

Turkey got its first investment-grade rating from Fitch on Nov. 5, which gave it a BBB- rating, putting it four levels below Israel. It’s rated junk by both Moody’s and S&P, with the former ranking it six levels below Israel and the latter seven.

The ratings divergence “is still a puzzle,” according to Daniel Hewitt, London-based senior economist for emerging markets at Barclays Plc. “Government debt levels in Turkey are a lot lower than Israel’s compared to GDP.”

Yield Directions

Israel has a $243 billion gross domestic product and $155 billion in government debt, according to data compiled by Bloomberg, giving it a debt-to-GDP ratio of 64 percent. Turkey has a comparable ratio of 36 percent, with an economy of about $800 billion and $286 billion in debt.

The yield on Israel’s 10-year dollar-denominated bonds maturing in June 2022 rose 1 basis point yesterday to 3.1 percent and Turkey’s 10-year dollar-denominated debt maturing three months earlier in 2022 fell one basis point to 3.24 percent. That narrowed the spread to 13 basis points, the lowest on record.

Israel’s relatively higher risk premium versus Turkey may be short-lived, according to Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc.

“Usually in this kind of escalation it’s a short-term impact on financial markets,” Katz said by telephone yesterday. “Our past experience is that the negative impact on Israel risk has been temporary.”

No Shelter

The premium investors demand to hold Turkey’s dollar- denominated debt over U.S. Treasuries narrowed seven basis points, or 0.07 percentage point, to 193, according to JPMorgan Chase & Co.’s EMBI Global Index. The average for emerging markets was 301.

The Turkish lira strengthened 0.4 percent to 1.7997 per dollar at 6:20 p.m. in Istanbul yesterday, extending this year’s gain to 5 percent. That compares with a 3.6 percent decline for the Israeli shekel. The yield on benchmark two-year lira notes dropped two basis points to 6.40 percent.

Oil traded near the highest level in more than a week amid concern that Middle East unrest could disrupt supply. That’s also a risk for Turkey, which imports about 95 percent of its energy and has the world’s biggest current-account deficit behind the U.S., according to Sen at Merrill Lynch.

“If the geo-political situation in the Middle East continues to worsen and potential tail risks come closer to reality, then while the shekel and Israel CDS will be the first to weaken, Turkish markets would also come under pressure,” he said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at; Alisa Odenheimer in Jerusalem at

To contact the editor responsible for this story: Gavin Serkin at

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