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Will Israeli Banks be Taking an 'Italian Haircut?'

Will Israeli banks have to take a "haircut" as a result of the Italian debt crisis?
By David Lev
First Publish: 11/10/2011, 5:22 PM

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Morguefile

After ostensibly working out a deal to resolve the Greek debt crisis last week, the spotlight has turned this week on perhaps Europe's biggest “debt bomb.” Italian officials say that for now, there is nothing to worry about. Yields on Italian 10-year bonds shot up to 7.25% Thursday afternoon – a euro-era high – as investors demanded ever-higher interest rates out of fear that they may not get all their money back, in the event of an Italian bankruptcy, or even just a bailout. The prospect of such an event has scared investors, sinking stock markets - and the value of the euro - around the world. In Israel, the dollar climbed more than 2% Wednesday, as investors sought the relative safety of the greenback, fleeing the euro.

If Italy does have to seek a bailout from the European Central Bank, as Greece, Ireland and Portugal did, chances are that banks and private investors holding Italian sovereign debt may have  to take a “haircut” - receiving less than the full value of the money owed to them. The debt writedown recently negotiated between the ECN and Greece is ostensibly voluntary, but all major banks are expected to participate, in order to stave off a “credit event” that could see their holdings all but wiped out.

In the case of the latest Greek debt deal – by no means guaranteed to be the last one – banks were asked to take a 50% writedown on the value of their debt. If that model holds for Italy as well, Israeli economists said, then some Israeli banks could suffer significant losses.

Most exposed, say economists, is Bank Leumi, which is at risk for NIS 795 million, although none of that money is in Italian sovereign debt. Of that amount, NIS 462 million is invested in bonds of Italian banks and financial institutions, which would probably require Bank Leumi, as an institutional customer, to suffer along with them the effects of a “haircut.” All the bonds Bank Leumi has invested in are rated AAA or AA, but, experts said, that may not matter much if Italy is forced to make a deal with the ECB. The effect of a haircut on Bank Leumi could be profound, as the bank's investment in Italy constitutes 5% of its total investment in international banks (however, the percentage is far lower when taking into account its total international investment portfolio and cash on hand in foreign banks).

Several other Israeli banks are exposed as well, but for far less. The First International Bank (BenLeumi) holds NIS 74 million in Italian sovereign debt, due to mature in 2017. Other banks have even smaller investments that could be affected by the Italian debt crisis, experts said.