The Israel BDS movement is winning some headlines and even some successes in challenging US and foreign investment in Israel government bonds which play a direct role in funding war crimes against Palestinians. The latest salvo in this campaign is a taxpayer lawsuit against Palm Beach County controller Joseph Abruzzo, who has invested 15% of the county\u2019s funds in Israel government bonds. This row is also exposing the exceptionally Israel-friendly rules that allow states and municipalities to invest in Israel government bonds but not those of, say, other countries such as Germany, Switzerland, or Canada. We\u2019ll give some background on the Israel bonds before turning to the Palm Beach County case and unseemly enthusiasm by among US government investors. <\/p>\n
Your humble blogger must confess to having doubts about the \u201cdivest\u201d part of the BDS campaign. The \u201cboycott\u201d part has and remains the best of the three options for inflicting costs on the genocidal state. Ansar Allah is also having unexpected success in its novel sanctions variant of messing with Israel-related shipping. <\/p>\n
The divest part seemed least promising in terms of economic impact. Many of the key divestment targets in the US, namely university endowments, foundations, and pension funds, would be highly resistant to selling. The few that might knuncle under would find investors that were agnostic or Israel backers who would regard any large-ish sale as a buying opportunity. But it still seemed worthy to force trustees to \u2018splain why they are supporting genocide.<\/p>\n
But Israel sells lot of Israel bonds overseas, and of course most of all in the US, to help fund government operations. These bonds consist both tradable government bonds and bonds that are akin to the old US savings bonds, designed to be hold-to-maturity instruments. <\/p>\n
They have become deservedly controversial because as the Israel genocide, um, war, has ramped up, so too has the issuance of these bonds, which fund the general budget and therefore the extermination program. Of course, US as stalwart backer of Israel is not likely to see much action on the divestiture front any time soon. But US is behind here; the highly respected Norway sovereign wealth fund and its largest public pension fund have exited their Israel government bond holdings and are also selling corporate investments. And the Palm Beach County suit, based an allegation of breach of fudiciary duty and questions about investment rationale, is increasing the scrutiny of these bonds generally.<\/p>\n
Particularly for government investors, there are two types of considerations, economic and political. Buyers of Israel bonds make their investment case by arguing that they pay more interest than Treasuries. Wellie, they sure as hell ought to! Israel is a small economy. These bonds are dollar-denominated, exposing Israel to currency risk. They are not as liquid as Treasuries. And importantly, the economic prospects for Israel are negative. Israel reported a GDP fall at an annual rate for 4Q 2023 of nearly 22%<\/a>. The report for 1Q 2024 was a rise of 14.1%. which even if not statistically manipulated (recall that many key negatives, such as tourism being dead and the Houthis restricting trade are very much in effect) still puts Israel as well worse off than before the war. <\/p>\n Both Moody\u2019s and S&P have downgraded Israel\u2019s sovereign debt since the war started by one notch; Fitch has Israel at the same ratings level of A+ as Moodys, which is a ratings level lower than the S&P designation. All three ratings agencies have a negative outlook<\/a>.1<\/sup><\/p>\n Yours truly can pretty much guarantee that the US state and municipal investors in these bonds lacked the analytical chops to analyze properly whether the interest premium to Treasuries adequately compensates for the additional risk of the Israel bonds. They would rely on salesman patter. Given that many of these investors are likely investing out of a stealthy statement of personal affinity or to placate\/curry favor with powerful Zionist constituents, and that that is overwhelmingly the motivation for wealthy individuals for in these bonds, absent other evidence, these bonds are probably overpriced relative to their investment merits. And it seems just as unlikely that many recognized losses if they bought them before the credit agency downgrades and posting of negative outlooks. <\/p>\n The Cradle published last week that Israel officials are warning of continued large deficits as war costs reach $70 billion. Experts also described a continuing poor outlook for the economy. From The Cradle<\/a>:<\/p>\n The chief of Israel\u2019s central bank said on 30 May that the cost of the ongoing war in the Gaza Strip will amount to nearly $70 billion of the Israeli budget for 2025\u2026<\/p>\n \u201cThe defense and civilian costs amount to hundreds of billions of shekels \u2013 it is a heavy burden \u2026 The country\u2019s risk premium increased while the excess devaluation of the shekel continued, with devaluation of course leading to price increases.\u201d <\/p>\n The significant boost in defense spending has played a major role in the mounting costs. <\/p>\n Manuel Trajtenberg, a professor from Tel Aviv University\u2019s economics department, warned that Israel \u201cmay slide back into another lost decade\u201d if it does not lower its defense-spending-to-GDP ratio, referring to a period of economic decline following the 1973 Arab\u2013Israeli war after which Israel spent years trying to balance between its defense and development spending as a result of the costs of that war on its economy. <\/p>\n The central bank chief\u2019s comments came a day after Tzachi Hanegbi, head of Israel\u2019s National Security Council, said that another seven months of fighting is expected to take place in the Gaza Strip, where Tel Aviv has yet to achieve its stated goal of eradicating Hamas and returning its captive prisoners. <\/p>\n<\/blockquote>\n The Financial Times reported in November how the war was forcing Israel to step up its overseas borrowing<\/a>:<\/p>\n Israel has borrowed billions of dollars in recent weeks through privately negotiated deals to help fund its war against Hamas but is having to pay unusually high borrowing costs to get the deals over the line.<\/p>\n<\/blockquote>\n Yves here. The higher interest rates reflected economic risk so one could argue, as many investors no doubt told themselves, that the greater hazards were priced in. But with the benefit of hindsight, did they adequately anticipate the rating agency downgrades and the continuing budget bleeding and weakening of the currency? As we\u2019ll see in a later article from the pink paper, Israel has a big pool of partisan buyers in the US, so even this richer pricing can\u2019t be assumed to be economically rational. Continuing with relevant sections of the same story:<\/p>\n Since Hamas\u2019s attack on October 7, Israel has raised more than $6bn from international debt investors. This has included $5.1bn across three new bond issues and six top-ups of existing dollar and euro-denominated bonds, and more than $1bn of fundraising through a US entity.<\/p>\n Investors said recent bonds had been issued in so-called private placements, a process through which the securities are not offered to the public market but instead sold to select investors.<\/p>\n The final pricing of the deals was not disclosed. However, bankers said they had priced in line with what they would expect from a public deal. Of two dollar bonds issued in November, Israel is paying coupons of 6.25 per cent and 6.5 per cent on bonds maturing in four and eight years\u2019 time.<\/p>\n That is much higher than benchmark US Treasury yields, which ranged between 4.5 and 4.7 per cent when the bonds were issued. The deals were arranged by Goldman Sachs and Bank of America respectively.<\/p>\n In contrast, Israel issued a 2033 dollar bond in January with a coupon of 4.5 per cent, a much smaller spread \u2014 or gap \u2014 above Treasury yields, which were 3.6 per cent at the time.<\/p>\n<\/blockquote>\n Yves again. I hate to sound like a stickler, but private placement buyers should get a better deal (pricing or other terms) than public securities investor to compensate for the lack of liquidity. Nevertheless, the article did confirm this was a difficult sale due to both appearance and economic worries in some circles:<\/p>\n Investors and analysts noted that the bumper issuance was done through private placements rather than via open syndications and roadshows, which are usually carried out when new bonds are launched.<\/p>\n The reason for this, they said, could be to raise funds for the war effort quickly or without attracting unwanted attention, and could be a sign of how nervous some investors had grown about buying Israel\u2019s debt.<\/p>\n<\/blockquote>\n Norway\u2019s big investors have been in the lead of divesting from Israel. That includes the oddly generally ignored decision of its highly respected sovereign wealth fund of exiting its Israel bonds, a $500 billion position, in November.<\/a> From Israel and Palestine<\/a>:<\/p>\n Norway\u2019s sovereign wealth fund, the world\u2019s largest, has made a significant move by completely divesting from Israel Bonds, citing the ongoing war on Gaza and adherence to its ethical guidelines. This decision by Norges Bank Investment Management, overseeing a staggering $1.4 trillion, marks a pivotal moment in the financial sector\u2019s response to the Israeli-Palestinian conflict. The divestment, valued at nearly half a billion dollars, is not only a financial blow to Israel but also a symbolic victory for the Boycott, Divestment, and Sanctions (BDS) movement, which campaigns against Israeli apartheid and for Palestinian rights.<\/p>\n<\/blockquote>\n And in early May, KLP, Norway\u2019s largest pension fund, divests from companies tied to Israeli settlements<\/a> in Uniglobal:<\/p>\n With some US$95 billion worth of assets, Norway\u2019s largest pension fund KLP has divested from 16 companies due to their ties to Israeli settlements in the occupied West Bank\u2026<\/p>\n KLP reached this decision from conducting human rights due diligence on its investments, which considered the human rights risks at the companies identified in the 2020 UN report as having operations linked to the Israeli settlements.<\/p>\n The exclusion comes weeks after Norway\u2019s sovereign wealth fund, managed by Norges Bank, pulled out of construction and real estate companies in the Palestinian territories. The United Nations recognizes the occupation of the West Bank as illegal.<\/p>\n<\/blockquote>\n Danish pensions have also been unwinding funding to anti-Palestine efforts<\/a>, so the divestment effort is starting to get traction in Northern Europe. <\/p>\n So back to the US battle lines. Both the Financial Times and The Nation covered the pending Palm Beach County suit and the intensified scrutiny of government investments in Israel bonds. First from the Financial Times<\/a>:<\/p>\n One of the largest investors in Israel\u2019s bonds is not a hedge fund titan or a Wall Street trader, but an elected municipal comptroller investing the tax dollars of Palm Beach County.<\/p>\n Joseph Abruzzo, the overseer of investments for Florida\u2019s largest county, holds $700mn out of his $4.6bn overall portfolio in so-called Israel bonds\u2026.<\/p>\n Israel Bonds, the official underwriter for the debt, says it has sold more than $3bn of the debt worldwide, three times the annual average, since October 7 last year \u2014 the date of the Hamas assault that triggered the latest conflict. Local governments in the US including the states of Florida, Indiana and Ohio have been enthusiastic recent buyers.<\/p>\n Sold directly to US investors sympathetic to Israel\u2019s cause, such bonds are becoming an increasingly high-profile part of the country\u2019s external funding. Last year they accounted for a quarter of Israel\u2019s external debt issuance\u2026..<\/p>\n Israel also sold $8bn in more conventional international US dollar bonds in March\u2026<\/p>\n The bonds, which are difficult to sell and are designed to be held to maturity, were for many years mostly marketed to the global Jewish diaspora\u2026<\/p>\n They are now being bought up across the US heartland due to a combination of political solidarity with Israel, demand for yields above those of US Treasuries but with a perceived low risk, and laws that have for years gradually placed Israel\u2019s debt among the few permitted bond investments for typically staid local government portfolios.\n<\/p>\n<\/blockquote>\n Note that there are two type of Israel bonds, the \u201cconventional\u201d ones which are presumably readily tradable, and the private placement bonds being hoovered up by US government investors, which are hold to maturity and therefore higher risk. Note also that this is effectively affinity marketing being paid for by taxpayers who are not only in large measure not part of the affinity group but included voters who are opposed to Zionism. <\/p>\n Even though Palm Beach County controller Abruzzo swears he loves the higher yields, it seems he also loves how he is currying favor with voters in a significantly Jewish community:<\/p>\n Abruzzo \u2014 who says he has received, \u201cwithout exaggeration, full-room applauses and standing ovations\u201d at community meetings for buying the bonds \u2014 said he was the first American investor to place an order for the Israel bonds after the October attack by Hamas.<\/p>\n<\/blockquote>\n The Financial Times saw fit to run a letter from the editor penned by a seasoned investor in Israel securities who disapproved of Abruzzo\u2019s Israel bond holdings. From Ian Maitland<\/a>:<\/p>\n Having had responsibility for NatWest exposure to Israel for many years I am a firm supporter of Israel (though their present policy is easy to understand but hard to defend).<\/p>\n Palm Beach County is taking a frightening risk in committing such a large proportion of its funds to one nation \u2014 and one class of security. This is reckless, regardless of any enthusiasm for Israel.<\/p>\n I am surprised that your interesting article does not mention the risks, which no public fund (or indeed any prudent investor) should undertake<\/p>\n<\/blockquote>\n So we turn to The Nation for a pointed critique in How Israel Bonds Put the Cost of the War in Gaza on US States and Municipalities<\/a>:<\/p>\n On September 30, 2023, the end of the fiscal year and just days before the Hamas attack on Israel, Palm Beach County held just $40 million in Israel bonds. At the time, this represented about 1 percent of Palm Beach County\u2019s total portfolio. Yet, over the next six months, Abruzzo made a series of investments adding up to a total of $700 million of taxpayer dollars in Israel bonds. The comptroller\u2019s office described the investments as a \u201cshow of support for Israel following their declaration of war against Hamas militants.\u201d<\/p>\n Abruzzo\u2019s spending spree transformed Palm Beach County into the single largest holder of Israel bonds in the world. The investment now represents 15 percent of Palm Beach County\u2019s $3.6 billion investment portfolio.<\/p>\n The lawsuit alleges that these investments constitute a violation of Florida Statute 218.415(24)(b), which mandates that \u201c[t]he unit of local government must make decisions based solely on pecuniary factors and may not subordinate the interests of the people of this state to other objectives.\u201d Ironically, this statute, passed just a year ago, was championed by conservative governor Ron DeSantis as a way to forestall any state investment considerations of ESG, or green, bonds.<\/p>\n<\/blockquote>\n It\u2019s going to be hard for Abruzzo to distance himself from his openly expressed Israle solidarity. The lawsuit describes both Israel\u2019s deteriorating economy and widening political schisms in detail. <\/p>\n Other government investors are being dragged into the hot lights:<\/p>\n U.S. State and Local Treasuries Hold At Least $1.6 Billion in Israel Bonds https:\/\/t.co\/GxERxugeUH<\/a><\/p>\n \u2014 \uff21\uff2b\uff33\uff21\uff32\uff22\uff25\uff2e\uff34 (@aksarbent) May 27, 2024<\/a><\/p>\n<\/blockquote>\n Along with some other investors who aren\u2019t subject to disclosure requirements:<\/p>\n UAW Labor for Palestine has learned that the UAW International Executive Board recently voted down a motion to divest from Israel Bonds \ud83e\udd14\ud83e\udd14\ud83e\udd14@uawlabor4pal<\/a> pic.twitter.com\/3WnADIMlec<\/a><\/p>\n \u2014 People’s City Council \u2013 Los Angeles (@PplsCityCouncil) May 21, 2024<\/a><\/p>\n<\/blockquote>\n Again, none of this is earth-shaking. It\u2019s more of a death-of-a-thousand-cuts process, another element of an attritional war against Israel\u2019s legitimacy. <\/p>\n ______<\/p>\n\n
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