NICER THAN THEIR U$ RAATING
Galit Altstein
Mon, 14 August 2023
(Bloomberg) -- Israel’s credit score was affirmed with a stable outlook by Fitch Ratings, in a surprise reprieve for the government following months of protests over a planned judicial overhaul that’s rattled investors.
Fitch kept the sovereign rating at A+, its fifth-highest investment-grade level and on par with Saudi Arabia and Malta. In a statement on Monday, it said the government’s divisive plan “has been watered down but remains highly controversial.”
“Our base case assumes limited impact from the judicial changes beyond the protests’ impact on consumption and a delay in some capital investment decisions, although risks of a greater impact remain,” it said.
Israel’s currency traded little changed against the dollar as of 4:11 p.m. in Tel Aviv. With a loss of about 10% since late January, the shekel is among the five worst performers among a basket of major currencies tracked by Bloomberg.
The reassurance followed months of warnings from the three major credit assessors over the risks facing Israel as a result of the fallout from political and social tensions.
In a joint statement, Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich seized on Fitch’s remarks as evidence of “what we have been saying all along — Israel’s economy is strong, stable and solid.”
“Israel is good for business,” they said. “Those who invest in Israel — benefit.”
Netanyahu returned to power following elections last year by forming a pact with far right, ultra-Orthodox and nationalist parties. The coalition soon rolled out plans to reduce the power of the courts, triggering mass protests from opponents who feared an erosion of the country’s democracy.
Though the effort was briefly suspended in March, negotiations to find a compromise between Netanyahu’s cabinet and the opposition eventually broke down. In late July, parliament passed legislation that prevents judges from voiding government decisions they deem “unreasonable” during a session that was boycotted by opposition lawmakers.
Different Paths
Netanyahu and his supporters argue that the current system has given judges too much power. Opponents say the country’s political structure means the judiciary is the only real check on politicians.
In an interview this month, Netanyahu said his government would also seek to change the way judges are selected, prompting a backlash from Israel’s opposition and protest movement. Though the prime minister promised to negotiate, he said the government would move forward with the measure if it gets enough support for it from the public.
“The changes may have a negative impact on Israel’s credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators,” Fitch analysts led by Cedric Julien Berry said in the report. “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.”
The rating company attributed much of the decline in funds raised by Israel’s high-tech industry this year to “global trends” and said it was hard to estimate how much the political turmoil had affected investors.
“Uncertainty generated by the judicial changes only partly explains this,” Fitch said. “The sector’s diversification and maturity provide substantial resistance to shocks, although some segments are likely to suffer from more constrained funding options.”
Galit Altstein
Mon, 14 August 2023
(Bloomberg) -- Israel’s credit score was affirmed with a stable outlook by Fitch Ratings, in a surprise reprieve for the government following months of protests over a planned judicial overhaul that’s rattled investors.
Fitch kept the sovereign rating at A+, its fifth-highest investment-grade level and on par with Saudi Arabia and Malta. In a statement on Monday, it said the government’s divisive plan “has been watered down but remains highly controversial.”
“Our base case assumes limited impact from the judicial changes beyond the protests’ impact on consumption and a delay in some capital investment decisions, although risks of a greater impact remain,” it said.
Israel’s currency traded little changed against the dollar as of 4:11 p.m. in Tel Aviv. With a loss of about 10% since late January, the shekel is among the five worst performers among a basket of major currencies tracked by Bloomberg.
The reassurance followed months of warnings from the three major credit assessors over the risks facing Israel as a result of the fallout from political and social tensions.
In a joint statement, Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich seized on Fitch’s remarks as evidence of “what we have been saying all along — Israel’s economy is strong, stable and solid.”
“Israel is good for business,” they said. “Those who invest in Israel — benefit.”
Netanyahu returned to power following elections last year by forming a pact with far right, ultra-Orthodox and nationalist parties. The coalition soon rolled out plans to reduce the power of the courts, triggering mass protests from opponents who feared an erosion of the country’s democracy.
Though the effort was briefly suspended in March, negotiations to find a compromise between Netanyahu’s cabinet and the opposition eventually broke down. In late July, parliament passed legislation that prevents judges from voiding government decisions they deem “unreasonable” during a session that was boycotted by opposition lawmakers.
Different Paths
Netanyahu and his supporters argue that the current system has given judges too much power. Opponents say the country’s political structure means the judiciary is the only real check on politicians.
In an interview this month, Netanyahu said his government would also seek to change the way judges are selected, prompting a backlash from Israel’s opposition and protest movement. Though the prime minister promised to negotiate, he said the government would move forward with the measure if it gets enough support for it from the public.
“The changes may have a negative impact on Israel’s credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators,” Fitch analysts led by Cedric Julien Berry said in the report. “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.”
The rating company attributed much of the decline in funds raised by Israel’s high-tech industry this year to “global trends” and said it was hard to estimate how much the political turmoil had affected investors.
“Uncertainty generated by the judicial changes only partly explains this,” Fitch said. “The sector’s diversification and maturity provide substantial resistance to shocks, although some segments are likely to suffer from more constrained funding options.”
Bloomberg Businessweek
Analysis-US loss of AAA badge a reminder of 'regime shift' for government debt
Yoruk Bahceli
Sun, August 13, 2023
Traders work on the floor of the NYSE in New York
(Reuters) - Financial markets barely flinched when Fitch stripped the United States of its top credit rating, but it served as a reminder of longer-term structural risks investors in government bonds are yet to grasp.
The immediate focus in the aftermath of the Aug. 1 downgrade has been on U.S. governance, but Fitch Ratings also flagged higher rates driving up debt service costs, an aging population and rising healthcare spending, echoing challenges that reverberate globally.
David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, a 3.7 billion-pound ($4.71 billion)charity-owned investor, said with the move highlighting reflecting elevated debt levels at a time when interest rates will likely remain high, debt sustainability was back in focus.
"I think it really brings home that shift being a regime shift rather than a cyclical one," Katimbo-Mugwanya said.
Pressures investors will eventually face include ageing populations, climate change and geopolitical tensions.
Such risks are making some investors, including hedge fund manager Bill Ackman, bet on rising longer-term borrowing costs. Yet many investors say factors at play are too complex and their impact too far out to influence their investment decisions.
"The rating agencies are not looking at them in a systemic way. And the investors even less," said Moritz Kraemer, former head of sovereign ratings at S&P Global, now chief economist at German lender LBBW.
WARNING SIGNS
There is no shortage of research sounding alarm.
Without cuts to age-related spending, median net government debt will rise to 101% of gross domestic product in advanced and 156% in emerging economies by 2060, S&P Global Ratings said in a study this year.
S&P said the assumption that governments would prioritise servicing debt over spending promises had rarely been tested at such high debt levels.
It expects policy steps that will make ageing-related costs more manageable. Not taking them would see creditworthiness deteriorate and half the governments it rates would have metrics associated with junk credit ratings while even top-rated governments would lose the highest ratings, S&P said.
For the European Union and the euro area, where public pensions and healthcare play a major role, the European Commission and European Central Bank have also flagged costs related to ageing as a key risk to debt sustainability.
Japan is one major economy where financing costs remain low even as its debt exceeds 260% of GDP and it has one of the world's oldest populations. But that reflects high domestic ownership of government debt and ultra loose monetary policy - a hard act to follow with higher inflation.
On the environmental front, a study last week showed a failure to curb carbon emissions will raise debt-servicing costs for 59 nations within the next decade.
"These long-term risks may not possess a well-established historical precedent, making reliance solely on historical data for risk assessment a challenge," said Gael Fichan, head of fixed income at Swiss private bank Syz Group.
For now, despite the steepest increases in borrowing costs in decades, investors still see little risk in holding governments' longer-term debt.
For example, the New York Fed estimates longer-term U.S. Treasuries still yield less than rolling over short-term debt - a legacy of central bank government bond buying.
However, as central banks now roll off that debt and government financing needs rise, that should reverse, investors say. A recent rise in long-dated bond yields in reaction to a surge in U.S. borrowing needs was a case in point.
"As the supply of long-dated Treasuries rises, investors may demand higher term premia to compensate for the added risk of holding bonds with longer maturities," Fichan said.
Kraemer, the former S&P official, said it was "unreasonable" that shorter and longer-term government debt were rated the same.
POLICY WATCH
Greater focus on longer-term risks should bring scrutiny of government policies.
Policy "is going to matter more especially in terms of the fiscal side of things about how the governments are reacting to the various promises to the electorate and what they're trying to achieve," said Kshitij Sinha, a fund manager at Canada Life Asset Management.
It will be crucial whether governments can bring down relative debt levels by boosting economic growth, and here climate change is both a challenge and opportunity.
"The green transition will require quite some investments... that will also increase the overall debt levels further, but down the road… you will profit from it," said Martin Lenz, senior portfolio manager at Union Investment, which manages 424 billion euros.
Still, with higher debt an economic reality, few governments are left with the coveted AAA rating.
"Can there be a world without AAA sovereigns? Yeah, I think there can be, We've seen this happening in the corporate space, for example," LBBW's Kraemer said, adding that out of dozens of AAA-rated U.S. companies in 1980s now there were only two left.
($1 = 0.7854 pounds)
(Reporting by Yoruk Bahceli, additional reporting by Davide Barbuscia, editing by Tomasz Janowski)
Yoruk Bahceli
Sun, August 13, 2023
Traders work on the floor of the NYSE in New York
(Reuters) - Financial markets barely flinched when Fitch stripped the United States of its top credit rating, but it served as a reminder of longer-term structural risks investors in government bonds are yet to grasp.
The immediate focus in the aftermath of the Aug. 1 downgrade has been on U.S. governance, but Fitch Ratings also flagged higher rates driving up debt service costs, an aging population and rising healthcare spending, echoing challenges that reverberate globally.
David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, a 3.7 billion-pound ($4.71 billion)charity-owned investor, said with the move highlighting reflecting elevated debt levels at a time when interest rates will likely remain high, debt sustainability was back in focus.
"I think it really brings home that shift being a regime shift rather than a cyclical one," Katimbo-Mugwanya said.
Pressures investors will eventually face include ageing populations, climate change and geopolitical tensions.
Such risks are making some investors, including hedge fund manager Bill Ackman, bet on rising longer-term borrowing costs. Yet many investors say factors at play are too complex and their impact too far out to influence their investment decisions.
"The rating agencies are not looking at them in a systemic way. And the investors even less," said Moritz Kraemer, former head of sovereign ratings at S&P Global, now chief economist at German lender LBBW.
WARNING SIGNS
There is no shortage of research sounding alarm.
Without cuts to age-related spending, median net government debt will rise to 101% of gross domestic product in advanced and 156% in emerging economies by 2060, S&P Global Ratings said in a study this year.
S&P said the assumption that governments would prioritise servicing debt over spending promises had rarely been tested at such high debt levels.
It expects policy steps that will make ageing-related costs more manageable. Not taking them would see creditworthiness deteriorate and half the governments it rates would have metrics associated with junk credit ratings while even top-rated governments would lose the highest ratings, S&P said.
For the European Union and the euro area, where public pensions and healthcare play a major role, the European Commission and European Central Bank have also flagged costs related to ageing as a key risk to debt sustainability.
Japan is one major economy where financing costs remain low even as its debt exceeds 260% of GDP and it has one of the world's oldest populations. But that reflects high domestic ownership of government debt and ultra loose monetary policy - a hard act to follow with higher inflation.
On the environmental front, a study last week showed a failure to curb carbon emissions will raise debt-servicing costs for 59 nations within the next decade.
"These long-term risks may not possess a well-established historical precedent, making reliance solely on historical data for risk assessment a challenge," said Gael Fichan, head of fixed income at Swiss private bank Syz Group.
For now, despite the steepest increases in borrowing costs in decades, investors still see little risk in holding governments' longer-term debt.
For example, the New York Fed estimates longer-term U.S. Treasuries still yield less than rolling over short-term debt - a legacy of central bank government bond buying.
However, as central banks now roll off that debt and government financing needs rise, that should reverse, investors say. A recent rise in long-dated bond yields in reaction to a surge in U.S. borrowing needs was a case in point.
"As the supply of long-dated Treasuries rises, investors may demand higher term premia to compensate for the added risk of holding bonds with longer maturities," Fichan said.
Kraemer, the former S&P official, said it was "unreasonable" that shorter and longer-term government debt were rated the same.
POLICY WATCH
Greater focus on longer-term risks should bring scrutiny of government policies.
Policy "is going to matter more especially in terms of the fiscal side of things about how the governments are reacting to the various promises to the electorate and what they're trying to achieve," said Kshitij Sinha, a fund manager at Canada Life Asset Management.
It will be crucial whether governments can bring down relative debt levels by boosting economic growth, and here climate change is both a challenge and opportunity.
"The green transition will require quite some investments... that will also increase the overall debt levels further, but down the road… you will profit from it," said Martin Lenz, senior portfolio manager at Union Investment, which manages 424 billion euros.
Still, with higher debt an economic reality, few governments are left with the coveted AAA rating.
"Can there be a world without AAA sovereigns? Yeah, I think there can be, We've seen this happening in the corporate space, for example," LBBW's Kraemer said, adding that out of dozens of AAA-rated U.S. companies in 1980s now there were only two left.
($1 = 0.7854 pounds)
(Reporting by Yoruk Bahceli, additional reporting by Davide Barbuscia, editing by Tomasz Janowski)
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