Isreal plans to create a risk and liability management office within the Ministry of Finance in the coming months and as a result will boost its use of over-the-counter derivatives, according to Arnon Ikan, senior director for foreign currency transactions in Jerusalem. The country has only used a handful of interest-rate swaps to date.
Ikan said the sovereign has recently hired a consultant from Hebrew University, whom he declined to name, to develop an internal risk and liability management model, and it may seek advice from investment banks regarding how derivatives can be used to achieve desired levels of risk.
The creation of the new risk management office is part of a broader reorganization within the ministry that has seen the combination of the accountant general's office, which deals with external debt management, and the capital markets division, which handles domestic debt. "If we look at the handling of liabilities, this lets us more efficiently and economically handle debt management," Ikan said. He noted that this is part of a general trend of sovereigns stepping up their use of derivatives and cited Spain (DW, 11/12) and France (DW, 1/14) as major countries leading the effort.
The changes are occurring now as the Jewish state's issuance program matures, Ikan said. Although it has USD27 billion of external debt, just USD1.9 billion of that is publicly traded Israeli bonds. Derivatives will be used for this portion of the country's debt, as the remainder of the USD27 billion is in other instruments such as U.S.-guaranteed bonds, U.S. and German government-backed loans, syndicated loans and retail savings bonds. Basically, Israel will use derivatives more as it issues more unsecured debt, he said. "We have a unique debt profile--the proportion of our [unsecured] debt is rather low now--but as the years pass the proportion of our bonds which are not guaranteed will be larger. This is a step toward independence for us," he said.
Moody's Investors Service rates Israel A2 and Standard & Poor's has rates it one notch lower at A minus.
