Shekel Drops Most in 5 Months as Greek Vote Threatens Debt Plan

The shekel weakened the most in more than five months and government bonds soared as demand for riskier assets waned amid concern a Greek referendum may jeopardize the European Union bailout plan.

The shekel slumped as much as 1.9 percent against the dollar, the biggest intraday drop since May 23. The currency was 1.2 percent lower at 3.6665 at 4:47 p.m. in Tel Aviv as the greenback strengthened against all of 16 major currencies tracked by Bloomberg. The yield on the benchmark 5.5 Mimshal Shiklit bond due January 2022, fell three basis points, or 0.03 percentage point to 4.59 percent, the lowest since Oct. 9.

“The Greek referendum is adding to concern on the implementation and effectiveness of the EU debt relief plan to curb a crisis in the region” Eytan Admoni, head of the international department at Bank of Jerusalem Ltd., said by telephone. “Investors are keeping away from riskier assets.”

Emerging-market stocks and currencies declined today after Greek Prime Minister George Papandreou pledged to hold a referendum on the European debt plan. Fitch Ratings said the proposal posed a threat to Europe’s financial stability. Group of 20 leaders will gather this week for a summit in Cannes, France, to discuss the debt crisis.

The Stoxx Europe 600 Index slid 3.3 percent, bringing the two-day decline to 5.4 percent. The TA-25 Index retreated 2.8 percent, the most since Oct. 4, to 1,102.07.

Credit Risk

Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, increased 10 basis points to 158, according to CMA. The data provider is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Defense Minister Ehud Barak today called for expanding military spending and breaching budgetary targets, a move Finance Minister Yuval Steinitz said might weaken the economy and increase unemployment.

“This isn’t the time to increase spending as the global economy is in panic and amid social protests against high living costs,” said Rony Gitlin, head of spot trading at Bank Leumi Le-Israel Ltd. in Tel Aviv.

The cabinet this week approved a plan that will raise taxes on companies and the wealthy while easing the burden on the middle class, after rallies brought hundreds of thousands of protesters to the streets. The Finance Ministry said yesterday growth will slow to about 4 percent next year from 4.8 percent in 2011 as an expansion in exports eases.

Fund Redemptions

The Tel-Bond 40 index of corporate bonds fell to the lowest since Oct. 17, declining 0.6 percent. Investors withdrew about 880 million shekels ($241 million) from Israeli funds last month, the smallest drawdown since March, Meitav Investment House Ltd. said today. The redemptions included 640 million shekels from corporate-bond funds and 20 million shekels from stock funds.

The two-year breakeven rate, which reflects market expectations for inflation over the period, slid 12 basis points, the most since Oct. 3, to 174. That implies an average annual inflation rate of 1.74 percent. The yield on inflation-linked bonds due June 2013 retreated three basis points to 0.94 percent.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, dropped for a second day, declining three basis points to 2.79 percent.

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