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August 9, 2011 10:44 am

Israel Defers Use of US Loan Guarantees

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Bank of Israel, Jerusalem. Photo: Ester Inbar.

Since its establishment in 1951, the Development Corporation for Israel/State of Israel Bonds has been a safe financial haven for pension funds and personal investments, IRAs, foundation endowment funds, and charitable and individual gift-giving entities. It has an unblemished Sixty year long record of full and complete repayment of each of its obligations. Considered “among Israel’s most valued and dependable economic resources,” this reliable financial instrument has a proven record of success.

Sales to date have exceeded $32 billion. Bonds have served a central role in Israel’s development and transformation.  However, despite this flawless history, on August 8, 2011, Standard & Poor’s downgraded its rating on the nearly $6 billion of Israeli securities and sovereign bonds guaranteed by America or directly tied to or backed by the U.S. government to AA+ from AAA.  The lowered designation is in line with the demotion of the U.S. debt rating (Friday) to AA+ from AAA.

“The U.S. downgrade doesn’t affect the safety of deposits in Israeli banks or the capital adequacy of domestic lenders,” Supervisor of Banks David Zaken told Bloomberg. Increased volatility in global markets and a possible slowdown in U.S. growth could affect other countries, including Israel, he said. The TA-25 benchmark index declined 7 percent, the most since October 2000, while the Tel Aviv banking index plunged 8.7 percent, the most on record.

S&P stated that there has been no change in the ratings of bonds issued by the State of Israel without attachment to American funding. These maintain their “A stat” ratings. “Only bonds issued in 2003 with an American guarantee are affected,” said Amnon Kraus, Deputy Chief Fiscal Officer for the State of Israel. S&P maintains Israel’s A/A-1 as unchanged.

Kraus told the Algemeiner that, should they wish to exercise it, Israel has another 3.8 billion dollars in American “loan guarantees” that could be utilized.  In fact, Israel has decided not to use the available American guarantees. “They are not needed,” he said,”because the economy of Israel is stable and strong. The guarantees remain as a ‘safety net’ – nice to have, and nice to know it is not needed.”

Kraus continued, noting that that the growth in the Israeli economy in 2011 is expected to be about 5%, as compared to a presumed 2% growth in America’s.

“There are many challenges to maintaining this growth. The demand for job creation increases, especially as Israeli Arab women and Ultra Orthodox men become more active in the labor market. “The economy is going in a good direction, “noted Amnon.  The debt has declined from 100 in 2003 to a current 75.  Very positive!”   He noted that even in the fiscal crisis year of 2008, Israel’s debt had increased by only by 2 %, and that had been further reduced through fiscally conservative policies. “What has impacted the Israeli economy,” he said “was the drop in the demand for export,” an area sensitive to world economic strength.

Asked what effect the challenge to provide thousands of units of new housing might have, Amnon said “there will be funding for housing. Every year, there is a new demand on the budget. Government – whether right or left, conservative or liberal – succeeds to manage within the budget. Good fiscal management throughout Israel’s history has helped the economy keep its direction. The overall aim is debt reduction.

Investing in Israel bonds provides a dual benefit, enabling purchasers to express personal support for Israel while simultaneously taking an important step towards the attainment of specific financial goals.”

The initial indication of a probable reduction occurred August 2 when S&P moved Israel’s AAA rated, U.S.-guaranteed sovereign bonds to “CreditWatch with negative implications” status,  yet did not state potential changes to the Israeli debt ranking. The U.S. has guaranteed $19 billion in Israel-issued bonds since the 1990s, providing Israel with favorable terms of interest when it borrows. As earlier reported in the Algemeiner, the prospect of those loan guarantees not continuing was well recognized before the current monetary predicament.

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