The government is expected to raise the record-breaking amount of NIS 200 billion over two years through bond issues. Apparently it will be raising NIS 100 billion in each of the years 2009 and 2010.

To put things in perspective, the state has raised an average of just NIS 40 billion to NIS 60 billion annually through bonds in recent years.

But this year, it has already raised some NIS 40 billion - and it is only May.

The huge leap in planned issuance are an consequence of the government's issuance in earlier "record" years - namely, the crisis years of 2002-2003, when Israel was slammed by the high-tech crisis on Wall Street.

The stressful economic situation at that time led to heavy deficits, forcing the government to greatly increase its bond debt.

Most of these issues were five- or six-year bond series that are now reaching maturity - just as Finance Minister Yuval Steinitz is contending with a new crisis and seeking financing for large deficits once again. Thus the government must greatly increase the size of the new issues merely in order to pay back the principal on the old bond series, even before it finances new government deficits.

Out of the NIS 200 billion that the government is set to raise over the next two years, about NIS 120 billion is earmarked for financing matured older bonds, while some NIS 80 billion is new money.

This additional debt - the net issuance - is likely to have a significant effect on the bond market. Replacing old debt with new is relatively easy, since the prevailing view is that bond holders will generally wish to reinvest their principal in government bonds.

But finding new money for investment in government bonds is more difficult. For the next two years, it will be another record challenge.

Moreover, the last time Israel had a net annual issuance of NIS 40 billion, it nearly ended in a financial crisis. Interest rates on shekel-denominated Shahar bonds soared to 12.5%, reflecting investor concerns that the state was nearing bankruptcy. Shahar bonds are now trading at interest rates of 5.0% to 5.2%, far below their scary peak of 2002.

The concern over the impact of record bond issues on the Israeli market is very real. In recent weeks, interest rates on long-term government bonds have risen by 0.5% - a sharp increase for so short a time. This could indicate that the capital market is signaling its distrust of the government's financial conduct, and particularly, its handling of the recent budget crisis.