Israel faces fresh hurdle for EU bond sales after Luxembourg declines prospectus renewal

Luxembourg has declined to renew authorisation for a prospectus used by Israel to market government bonds in the European Union, creating a new obstacle for the country’s access to European capital markets as criticism of its genocidal war on Gaza continues to grow.

The approval, which expired at the end of August, had been granted by Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF). It enabled Israel to use a Luxembourg-approved prospectus in offering bonds to investors elsewhere in the EU.

The decision does not stop Israel from issuing debt or block all European investors from purchasing Israeli bonds. But without an approved prospectus in an EU member state, Israel may have more difficulty promoting new issues across the bloc under the EU’s passporting system.

Israel will now need to identify another national regulator willing to approve the prospectus if it wants to continue reaching EU-based investors via the same route.

The development follows a similar dispute in Ireland, which previously oversaw the relevant prospectus arrangements but did not continue the role amid growing political opposition. Luxembourg subsequently became the approving jurisdiction, before allowing its authorisation to lapse this week.

Israel Bonds have become a focus for human rights advocates and pro-Palestine campaigners in their argument that European financial institutions should not facilitate borrowing by the Israeli state while its deadly military assault on Gaza – and the wider region – continues.

Israel’s government has relied heavily on borrowing to meet sharply increased expenditure since the start of the war in October 2023. While the proceeds from sovereign bonds enter general state finances rather than being formally allocated to military operations, campaigners say they nevertheless expand the government’s overall capacity to fund the war economy.

Amnesty International has called on European states to stop approving Israeli bond prospectuses, arguing that continued access to EU financial markets risks enabling grave violations in Palestine.

Limited financial blow, wider political consequences

Israel is unlikely to be shut out of international borrowing because of Luxembourg’s decision alone.

The country has a large domestic debt market and longstanding access to investors in the United States, where Israel Bonds have been sold for decades through the Development Corporation for Israel. Those channels are likely to remain far more important than the Luxembourg prospectus arrangement in immediate financing terms.

Nevertheless, the loss of an EU approval base could be significant. It forces Israel to find another regulator, exposes it to the possibility of further refusals and places European governments under pressure to explain whether they will continue facilitating Israeli debt issuance.

Luxembourg’s stance also raises questions about how EU prospectus rules are being interpreted. Its authorities have indicated that legal restrictions surrounding the transfer of prospectus approval were a factor in the decision.

However, the European Securities and Markets Authority has said national regulators can, in principle, accept the transfer of approval responsibilities in consecutive years, meaning that it leaves open the possibility that another EU state may agree to take on the role.