Israel’s Smotrich could paralyse Palestinian economy by ending bank waiver

Israeli Finance Minister Bezalel Smotrich cancelled a waiver that allows Palestinian banks to operate, potentially paralyzing the Palestinian economy, which relies on the Israeli banking system since it lacks its own central bank or currency. This action follows sanctions imposed on Smotrich by several Western nations for inciting violence against Palestinians. The waiver protects Israeli banks from legal action related to transactions with Palestinian counterparts, and its removal could trigger a humanitarian crisis, according to warnings from the US Treasury Secretary and the G7.

Analysis

Israeli Finance Minister Bezalel Smotrich has cancelled a critical waiver that permits Palestinian banks to conduct transactions with Israeli correspondent banks, a move that could severely cripple the Palestinian economy. This decision was announced shortly after five Western governments, including Australia, Canada, and the United Kingdom, imposed sanctions on Smotrich for inciting violence against Palestinians. The Palestinian economy is highly dependent on the Israeli banking system and the shekel, as the Palestinian Authority (PA) lacks its own central bank and currency. The now-revoked waiver protected Israeli banks from potential legal liabilities arising from their dealings with Palestinian financial institutions. Smotrich’s office explicitly linked the cancellation to the PA's international efforts to challenge illegal Israeli settlements, which it termed a “delegitimisation campaign.” This action follows prior warnings about its potential impact; U.S. Treasury Secretary Janet Yellen cautioned in May of the previous year that severing these banking ties could trigger a “humanitarian crisis.” Furthermore, G7 nations urged Israel in July to maintain the stability of Palestinian financial systems, and the United Nations has warned that such a unilateral cutoff could breach international law. Despite these international concerns, which had previously led to short-term extensions of the waiver, far-right ministers within the Israeli government, including Smotrich and National Security Minister Itamar Ben-Gvir, have consistently advocated for its termination, with Ben-Gvir previously stating the PA should be “completely cut off and collapsed.” The associated market impact score of 0.7 and extremely negative sentiment signal significant concern over this development.

Key Decisions for Investors

• Investors should closely monitor the escalating geopolitical tensions and the direct economic repercussions on the Palestinian territories, as this action significantly heightens the risk of a severe financial crisis and humanitarian distress.
• Consider reassessing exposure to any assets directly or indirectly linked to the regional economy, particularly those sensitive to disruptions in the Israeli-Palestinian financial ecosystem, given the potential for widespread instability.
• This event underscores the acute political risk in the region and its profound impact on economic stability; portfolios with regional exposure may warrant a review for appropriate risk mitigation strategies, including diversification or hedging against further negative developments.