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Palestinian Authority to issue debut government bonds to banks to restructure debt

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RAMALLAH, West Bank, April 8 (Reuters) - The Palestinian Authority said on Tuesday it plans to issue bonds to banks as part of a restructuring of its sizeable debts, in what will be the first sale of government bonds in the territory's 20-year history.

The government owed banks some $1.4 billion in 2012, according to latest data, while analysts said loans to Palestinian public sector employees and the government's private sector partners added a further $800 million to the debt pile.

Jihad Al Wazir, head of the Palestinian Monetary Authority, said around $200 million of debt would be converted to bonds.

"It's a swap agreement whereby instead of having short-term, one-year mostly compressed debts at higher interest rates, we would extend that to a three-year period and they would be held as a security," Al Wazir told Reuters.

The bonds would be traded within the banking system, he said, not in the open market.

Lending by banks in the Palestinian territories to the Palestinian Authority (PA) hovers at just over 100 percent of the banks' total equity - a level the International Monetary Fund considers a potential threat to financial stability.

Securitizing part of the debt through bonds will "ease the financial burden, confront challenges, lay the foundations of the state and prepare the banking system to deal with bond markets and government debt instruments," the cabinet said in a statement.

The PA has for much of its history relied on foreign aid to finance high deficits, which last year reached around $1.5 billion, or 13.7 percent of GDP.

But donor support has fallen sharply in the last two years amid the global economic downturn and as the Arab revolts attracted the attention of wealthy Gulf state donors, diverting funds that may otherwise have gone to the PA.

The financing gap has largely been filled by running up arrears and borrowing from domestic banks.

Independent economic analyst Nasser Abdul Kareem said the decision could be aimed at freeing up the government to borrow more by re-branding its debt to banks as loans.

"This gives the government some room to manoeuvre and to claim that the amount of bank loans has declined so they can borrow more. Because bonds are usually for long terms, they are cheaper than overdrafts and short-term borrowing," he said.

Palestinians seek a state in Gaza, the West Bank and East Jerusalem - lands captured by Israel in a 1967 war.

Peace talks to end the Israeli-Palestinian conflict came close to collapse this month and Israel threatened retaliation for Palestinian moves to confront Israel in international bodies.

In the past, Israel and the United States have docked payments to the PA for political moves they disagree with, deepening its cash crunch.

(Editing by Susan Fenton)