20th October 2026
Executive Summary
Israel’s continued access to international capital during prolonged warfare rests on substantial domestic financial resources and an exceptional framework of geopolitical protection. United States (US) military grants, sovereign guarantees and deferred procurement arrangements absorb or spread part of Israel’s defence costs, while American political and commercial interests sustain that support. Major European governments have also preserved extensive economic relations despite mounting international legal scrutiny and objections to Israeli military operations. These arrangements increase Israel’s capacity to finance costly military policies while distributing expenditure across US taxpayers, Israeli households and future budgets. The disparity between the economic protection afforded to Israel and the financial measures directed against institutions investigating its conduct exposes the political interests governing international economic accountability.
On 13 October 2026, Israel’s Ministry of Finance was considering further civilian spending reductions to accommodate additional military expenditure, amid discussions of a multiyear rearmament programme reportedly worth approximately USD 120 billion. Israel nevertheless retains substantial access to international capital. Its January issuance of USD 6 billion in five-, ten- and thirty-year bonds attracted USD 36 billion in orders from approximately 300 investors. Borrowing spreads averaged 102 basis points above comparable US Treasury securities, down from 154 basis points in the previous international issuance. The transaction preceded February’s renewed war involving Iran, but subsequent sovereign assessments continued to recognise Israel’s financing capacity despite growing debt and war-related economic losses. Such access does reflect domestic financial strengths but is also reinforced by exceptional foreign support.
Israel’s investment-grade status rests partly on considerable domestic resources. Foreign-exchange reserves reached approximately USD 237 billion in September 2026, while more than 80 percent of sovereign debt is domestically held and denominated in local currency. A developed institutional investor base and technology exports support repayment capacity. Yet public debt reached approximately 68.6 percent of gross domestic product (GDP) in 2025, and the International Monetary Fund (IMF) projects that it could reach 74 percent by 2031 without further adjustment. Moody’s retained its Baa1 rating in July 2026, while Fitch maintained an A rating with a negative outlook in March. Israel’s geopolitical protection reinforces this financial resilience, expanding the financing options available during prolonged military conflict.
The political foundation of this protection is the longstanding US commitment to Israel’s military superiority. American legislation requires consideration of Israel’s qualitative military edge when advanced weapons are sold elsewhere in the Middle East. Successive administrations have valued Israeli intelligence, defence technology and military capabilities within their regional strategy, particularly concerning Iran. Congressional support is reinforced by pro-Israel advocacy organisations, influential religious constituencies and defence manufacturers benefiting from military sales. These interests have preserved the relationship across administrations and disagreements over Israeli operations. Israel consequently plans major military acquisitions around anticipated American financing, with established political commitments providing continuity extending beyond individual aid packages or annual budget negotiations.
Under the 2019–2028 bilateral agreement, the US committed USD 38 billion in military assistance, comprising USD 33 billion in Foreign Military Financing (FMF) and USD 5 billion for missile defence, subject to congressional appropriations. Emergency allocations expanded support after October 2023. Brown University’s Costs of War Project estimates USD 21.7 billion in US military assistance between October 2023 and September 2025. It separately estimates USD 9.65–12.07 billion spent on related American military operations across the region. Those operations served wider US objectives while providing capabilities relevant to Israel’s military campaigns. The arrangements reduce the military resources Israel must finance domestically, transferring part of the expenditure to American taxpayers and expanding Israel’s capacity to sustain expensive operations.
Additional privileges are embedded in the financing mechanisms themselves. Approximately USD 3.8 billion in unused US sovereign loan guarantees remained available at the end of 2025, with authorisation extending through September 2030. Eligible borrowing benefits from an explicit American guarantee of principal and interest, while ordinary Israeli sovereign bonds remain Israel’s obligations. Annual FMF grants are generally transferred early into an interest-bearing Federal Reserve account. Cash-flow financing permits procurement commitments against expected future grants. For F-35 acquisitions, a banking consortium led by Citibank finances payments to Lockheed Martin through arrangements linked to future US funding. These mechanisms reduce immediate financing requirements and allow Israel to undertake major acquisitions extending across several budget cycles.
The relationship also supports established commercial interests. In April 2025, the US reported 751 active Foreign Military Sales cases involving Israel, valued at approximately USD 39.2 billion, including future procurement commitments. American defence manufacturers receive substantial orders, while Israeli companies participate in joint development programmes. International banks separately facilitate sovereign financing: an investigation identified approximately USD 19.4 billion in Israeli bond issuance underwritten by seven banks between October 2023 and January 2025. US state and municipal investors purchased more than USD 1.7 billion in Israel Bonds after October 2023, with some officials publicly expressing political solidarity. The resulting relationships connect Israel’s financing requirements to American industrial revenues, institutional investors and political constituencies with interests in continued cooperation.
These interests are shaping negotiations over the next bilateral military assistance agreement. In May 2026, Prime Minister Benjamin Netanyahu proposed gradually ending direct US military grants while expanding joint defence production and technological cooperation. Direct assistance amounts to approximately 0.5 percent of Israeli GDP but finances around 15 percent of its defence budget. Preferential provisions permitting some FMF expenditure on Israeli-produced equipment are scheduled to expire in 2028. Congressional proposals envisage deeper defence-industrial integration through research, production and procurement programmes funded through defence budgets. Such arrangements could preserve substantial military financing and commercial opportunities through different institutional channels. How spending and oversight are distributed would depend on the eventual agreements and congressional appropriations.
External support provides Israel with greater fiscal flexibility, although domestic households continue bearing considerable wartime costs. The IMF assessed economic output as approximately 9 percent below its pre-October 2023 trajectory, reflecting military mobilisation, labour shortages and weaker investment. Israeli households have faced frozen income-tax brackets and child-benefit payments alongside higher national insurance contributions. Additional military borrowing also competes with civilian expenditure. International financing and American military assistance allow the government to distribute costs across foreign partners and future budgets, reducing immediate pressure to curtail military commitments. Continued rearmament nevertheless requires resources that constrain civilian services, domestic investment and the government’s capacity to rebuild fiscal buffers.
The European Union (EU) provides another form of protection through continued market access and economic cooperation. It accounted for 31.7 percent of Israel’s goods trade in 2025. In September 2025, the European Commission proposed suspending certain trade preferences after concluding that Israel had breached the human-rights provisions of their Association Agreement. Germany and Italy resisted broader measures, while Spain and Ireland advocated stronger action. Targeted sanctions and some military export restrictions have proceeded, while European retail sales of Israel Bonds ceased in September 2026 following the expiry of the relevant prospectus approval. The wider trade relationship has continued despite the International Court of Justice’s (ICJ) July 2024 finding that Israel’s continued presence in the occupied Palestinian territory was unlawful. European political divisions have preserved substantial commercial advantages even as international scrutiny has intensified.
The selective application of financial restrictions exposes another dimension of Israel’s geopolitical protection. In November 2024, the International Criminal Court (ICC) issued arrest warrants for Netanyahu and former defence minister Yoav Gallant over alleged war crimes and crimes against humanity. A United Nations investigative commission concluded in September 2025 that Israeli authorities and security forces had committed genocide in Gaza, although the ICJ has yet to deliver a final judgment on that allegation. On 9 October 2026, the US expanded financial sanctions against the ICC, whose investigations include Israeli officials, while continuing extensive military financing and procurement cooperation with Israel. American sanctions can restrict access to banking services, technology and commercial relationships. The US government has therefore deployed financial pressure against an international accountability institution while maintaining privileged economic and military arrangements with the government whose officials it is investigating.