In the groundbreaking exploration of “Diaspora Bonds,” readers are invited to embark on a journey into the realms of global finance and social connectivity. With an insightful blend of research and real-world examples, this article delves into the transformative potential of Diaspora bonds, offering a refreshing perspective on economic empowerment and cross-border collaboration.

Discover how diaspora bonds are reshaping the landscape of international finance and unlocking new avenues for prosperity. Dive deeper into the pages of this compelling narrative to unveil the secrets behind harnessing the power of global diasporas for sustainable development and inclusive growth.

“Diaspora Bonds” offers a comprehensive examination of the role diaspora communities play in shaping economic landscapes and fostering development in their countries of origin. Through a blend of case studies, empirical evidence, and theoretical insights, the article highlights the potential of diaspora bonds as a tool for mobilizing resources and fostering social cohesion on a global scale. From innovative financing mechanisms to strategies for enhancing diaspora engagement, the authors provide valuable insights into harnessing the power of diaspora networks for sustainable development and inclusive growth.

Review

With meticulous research and compelling storytelling, “Diaspora Bonds” offers a timely exploration of a topic that is increasingly relevant in today’s interconnected world. By shedding light on the untapped potential of diaspora communities, the article not only provides valuable insights for policymakers and practitioners but also inspires readers to rethink traditional approaches to development finance. Whether you’re a scholar, policymaker, or global citizen interested in the dynamics of diaspora engagement, this article is sure to leave a lasting impression and spark meaningful conversations about the future of global finance and social transformation.

Genres

Finance, International Relations, Economic Development, Globalization, Migration Studies, Social Sciences, Investment Strategies, Public Policy, Financial Innovation, Empowerment

Recommendation

“Diaspora bonds” gain the attention of overseas nationals eager to support their homelands, even at returns lower than those of conventional bonds. Israel is probably the best-known issuer of diaspora bonds. The dynamics of Israel’s financing model suggest a way forward for GDP-indexed bonds – countercyclical debt instruments that would pay more to investors in good economic times and less during downturns. Finance experts Michael Bradley, Irving Arturo De Lira Salvatierra and Mitu Galati analyze the potential impacts of these bonds, particularly for developing economies, in this thorough, insightful report for investors and financial professionals.

Take-Aways

• “Diaspora bonds” attract investors, despite the sovereign debt’s lower yields.
• The Israeli diaspora bond program suggests that other nations could construct a countercyclical credit offering.
• Israel’s diaspora bonds show a lower yield in times of crisis and a higher yield in times of economic vigor.

Summary

“Diaspora bonds” attract investors, despite the sovereign debt’s lower yields.

In response to the Hamas attack on Israel on October 7, 2023, Israel issued sovereign debt to fund its war effort. In addition to conventional credit market financing, Israeli officials also sought out funds from overseas nationals and supporters via a program that Israel began in 1951. Interestingly, the rate on these diaspora bonds are lower than the market rates for other Israeli debt.

“The countercyclical aspect of diaspora financing that has led policymakers to advocate the use of diaspora bonds by poorer nations relates also to why many economic policymakers have advocated the use of GDP indexed bonds by vulnerable nations.”

This dynamic suggests there may indeed be a “countercyclical” financing mechanism at work. Economists and credit market professionals have long sought to bring a GDP-indexed bond to the sovereign debt market. This instrument would tap into countercyclicality: During a period of economic stagnation, a nation’s debt payments would lessen, while in a time of economic prosperity, its payments would increase.

The Israeli diaspora bond program suggests that other nations could construct a countercyclical credit offering.

The diaspora model depends on investors accepting a “patriotic discount,” which translates as a reduced interest rate. The challenge for advocates of countercyclical instruments is convincing investors to accept lower rates on a larger scale. For policy officials, solving this dilemma involves quantifying the level of interest rate discount. Israel’s program provides some clues in this context. Data on Israeli diaspora bond issuance from 2011 to 2024 reveals distinctive patterns in rate divergence, particularly in periods of economic, social and political distress, and in periods of economic vigor.

“The rates that Israel paid on these bonds decreased after the Hamas attack, in contrast to the borrowing rates it was being charged on the outside markets, which went up after the onset of the crisis.”

For much of the history of the Israeli diaspora bond, the rate has stood at 4%. In more recent decades, the rate has remained in line with the market, while topping the rate for US Treasury bonds. Investors regard “yield to maturity” as the metric for determining the “diaspora spread” – the difference between the rates of diaspora bonds and conventional sovereign debt offerings.

Israel’s diaspora bonds show a lower yield in times of crisis and a higher yield in times of economic vigor.

Throughout varying economic circumstances, the diaspora spread has shown positive and negative performance in comparison to conventional sovereign financing. In two specific cases – the COVID-19 epidemic and the Hamas attacks – Israel issued debt in the public markets and to the diaspora contingent. During those episodes, the diaspora yield proved lower than the yield on conventional sovereigns. This inversion indicates that, in times of crisis, diaspora investors accept a lower rate, while in times of economic prosperity, they receive a higher rate.

“The Israeli diaspora bonds program – while not fitting the conventional conception of a GDP indexed bond – might have found the magic elixir.”

This indicates that, theoretically, other countries could construct a countercyclical debt instrument that links to a nation’s GDP and behaves in line with the Israeli diaspora program. Such an instrument could benefit less developed economies by providing affordable and stable financing that could weather changing economic climates.

About the Authors

Michael Bradley is a professor at the Fuqua Business School at Duke University. Irving Arturo De Lira Salvatierra is with IO Quantum. Mitu Gulati is a law professor at the University of Virginia’s Law School.

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