Israeli Debt and Currency Slide After Vote Leaves No Clear Path to Power

The Israeli economy absorbed a shock on Wednesday as financial assets declined following a Knesset election that failed to produce a decisive winner. Partial counts indicated that Prime Minister Benjamin Netanyahu’s bloc was on track for 56 seats, while challenger Gadi Eisenkot’s camp was projected to secure 48 seats. With more than 66 percent of ballots counted, Arab-led parties not aligned with either major camp were projected to win 16 seats, leaving both leading contenders without the 61 votes needed to govern alone.

Market participants priced in the uncertainty immediately. The Israeli shekel lost 1 percent of its value against the U.S. dollar, while the Tel Aviv 35 stock index dropped 2.7 percent. Government bonds faced selling pressure across the maturity spectrum, driving yields higher. The yield on two-year bonds increased by 6 basis points, the benchmark 10-year bond yield rose by 4 basis points, and 30-year bond yields climbed by 2 basis points. Since bond prices and yields move in opposite directions, these figures reflect a retreat from Israeli debt.

The political outcome hinges on coalition formation, a process that often determines market stability. President Isaac Herzog will task the leader best positioned to assemble a governing majority with forming a cabinet. Eisenkot, a former military chief of staff, declared victory earlier in the day based on preliminary exit polls that showed his bloc slightly ahead. He stated that the results indicate a "complete lack of confidence in Netanyahu and his October 7 government." However, official results are not due until Nov. 4, and turnout reached 77.7 percent, the highest level in a Knesset election in 27 years.

The role of Arab-led parties has emerged as a decisive factor in the upcoming negotiations. Mansour Abbas, leader of Ra'am, said that "our vote will change the government." Ahmad Tibi, chairman of the Joint List faction, has previously outlined strategies to block Netanyahu from retaining power. Analysts note that these parties lean pro-Palestinian, aligning them ideologically closer to Eisenkot. Yet, no candidate has formally committed to including them in a coalition. Michael Feller, chief strategist at Geopolitical Strategy, noted that even if Eisenkot’s alliance wins more seats, forming a majority without Arab and left-wing parties is unlikely.

Avigdor Liberman, leader of Yisrael Beytenu, which is projected to win between seven and nine seats, has signaled resistance to relying on Arab partners. His party currently sits in the opposition bloc with Eisenkot. During the campaign, Netanyahu and his far-right allies warned of high Arab voter turnout, a claim opponents criticized as racial. Netanyahu posted images of long queues in Arab communities, stating, "If we don't wake up now, we'll find ourselves with a government of Mansour Abbas and Ahmed Tibi."

Context for this vote is shaped by the wars that have followed the Oct. 7, 2023 attack by Hamas. This is Israel's first national election since that date, and it was viewed as a referendum on Netanyahu's long tenure. Supporters credit him with steering the country through conflict, while critics cite his corruption trial and judicial overhaul efforts. An International Criminal Court arrest warrant hangs over the prime minister due to the Gaza campaign, a status he has rejected.

Historical precedent suggests that even if Eisenkot leads the seat count, Netanyahu may leverage the weeks ahead to stall government formation. Amin Saikal, an adjunct senior fellow at Singapore's S. Rajaratnam School of International Studies, said the prime minister will "fight for his political survival." Netanyahu has previously remained in office when rival parties failed to meet coalition deadlines. Israel held five elections between 2019 and 2022, a period defined by fragmented legislatures.

Experts anticipate a lengthy negotiation period following the official announcement on Nov. 4. P.R. Kumaraswamy, an emeritus professor of Middle Eastern Studies at Jawaharlal Nehru University, stated that it is "too early to write him off" regarding Netanyahu. The market reaction on Wednesday reflects the immediate cost of this ambiguity, with investors waiting to see which leader can first command the necessary 61-seat alliance.