Were Investors Blindsided by Stanley Fischer’s Exit?

A day before the central bank chief said he was quitting, Israel sold $2 billion of bonds at low rates.

On Monday night Israel raised $2 billion in an overseas offering of debt, in two series: one of 10-year bonds and one of long-term 30-year bonds. The accountant general's people over at the Finance Ministry said the investment community pounced on the debt. Demand soared to $9 billion, some 4.5 times the amount Israel sought to raise.

Moreover, the offerings closed at very low levels of interest, indicating that investors felt warm and fuzzy about Israeli state debt. The 30-year bonds closed at a spread of 145 basis points over comparable U.S. government bonds, while the 10-year bonds closed at a spread of 125 points. Those are very low spreads. They indicate, in theory, that investors feel Israeli debt isn't that much riskier than American debt.

The heavy demand coupled with the low spreads boil down to this: Investors badly wanted the goods. The demand and spreads are a sort of trophy for the Israeli economy and its leaders, and indeed the people over at the accountant general's office were strutting around like peacocks.

It's such a pity that the celebrations were abruptly truncated not a day later. The very next afternoon, Tuesday, Stanley Fischer up and quit as governor of the Bank of Israel, 22 months before his contract runs out.Fischer will be staying on until June, but in response to the announcement, Israeli bonds - such hot stuff just the night before - abruptly dropped 1% in price.

Who knew?

The question is, did the people at the Finance Ministry know on Monday that Fischer was about to announce his resignation? It's hard to believe the prime minister, Benjamin Netanyahu, wasn't in the loop. Shouldn't he have advised the foreign investment community, under what's known as "proper disclosure," that a pillar of the Israeli economy was quitting before his term was over?

Why didn't Fischer make the announcement before the bond issue, sparing the state this embarrassment? There is no question that the information was material to pricing the bonds, and to investors making decisions. If the foreign investment community had known that Fischer was about to move on, they could well have demanded a better price for the bonds which in other words means Israel would have had to pay higher interest.

This isn't all theoretical. Something similar happened with Leumi, Israel's second-largest bank. On November 10, 2011, the bank raised NIS 2 billion by offering deferred notes. Then on November 14 the bank published an earnings warning, caused mainly by losses in securities.

The concurrence of the two events and the absence of disclosure prodded Israel's securities watchdog to step in, and Leumi's CEO at the time, Galia Maor, was grilled about the affair, as were other top bank officials. The Israel Securities Authority wanted to know what role the CEO and top officers played in deciding not to defer the offering, and why the information presented in the earnings warning hadn't been brought to investors' attention ahead of the offering. Clearly the bank knew of its problems before it sold the deferred notes an offering also completed with stellar success.

At the end of the day the bank was fined NIS 4 million but no steps were taken against it or its officers.

But there is no global version of the ISA. If there was, it would also wonder at the synchroneity of the two events Israel's bond offering and Fischer's resignation. It would ask the finance people and prime minister hard questions. No, there is no such global securities policeman. Unhappily for Israel, though, crime and punishment mechanisms in the world are a lot faster and crueler than the merciful ISA. Israel's conduct will hurt it the next time it tries to sell debt to global investors, who are entitled to feel somebody made a monkey of them.

They will demand sweeter interest in exchange for their favor, to insure themselves against any surprises like the one that happened this week.
 

Bloomberg