Cablegate: Israeli Economic Crisis Plans

R 171536Z DEC 08



E.O. 12958: N/A

REFS: 1) Tel Aviv 2753 2) Tel Aviv 2739 3) Tel Aviv 2636 4) Tel Aviv 2597


1. The Ministry of Finance (MOF) has recently come out with several
plans to deal with a serious economic slowdown in Israel caused by
the global financial crisis. The first plan introduced by the MOF
is aimed at accelerating economic growth, with a primary emphasis on
investment in infrastructure. Another plan recently announced by
the MOF addresses the capital markets, especially the problems in
the corporate bond market. The final and most controversial plan
recently presented by the government is its proposal for providing a
safety net to pension and long-term fund (provident fund) savers.
The first two plans have been fully approved by the cabinet and the
Knesset Finance Committee and await full Knesset approval. After
much wrangling and political drama, the cabinet approved the pension
safety net plan, which now awaits action in the Knesset Finance
Committee. End Summary.

Accelerate Infrastructure Building

2. The first plan introduced by the MOF aims to accelerate economic
growth, mainly through investment in infrastructure. The plan calls
for spending of NIS 21.7 billion (USD 5.7 billion) on basic
infrastructure projects, especially transportation and water. The
plan also addresses professional training and education. It
increases the budget of the chief scientist, establishes a loan fund
for medium sized businesses, and expands a similar type of small
business loan fund. In addition, there are numerous other
provisions, such as one allowing businesses with sales turnover of
less than NIS 15 million to report and pay Value Added Tax on a
bimonthly basis, instead of monthly. The plan also includes a
provision to help exporters obtain financing.

Big Spending Has Little Short-Term Impact

3. Economists and analysts have generally welcomed the spending
plans. Bank Leumi economists have commented in their newsletters
that government intervention and an expansive monetary policy are
needed to accelerate economic activity. However, they note that the
infrastructure spending portion of the government's plan will
strengthen the economy in the long run and not do much for the short
and medium terms, which the plan is ostensibly intended to address.
Bank Leumi's growth forecast for 2009 is around 2 percent, with most
other economists coming in with forecasts in the same general area--
from 1.7-2 percent. With population growth expected to continue at
about 1.7 percent, this puts GDP per capita growth at close to zero.
Most economists are also forecasting a significant decline in state
tax revenues in 2009 due to the decline in economic activity. Ofer
Klein of Harel Insurance forecasts that state tax revenues could be
as much as NIS 30 billion (USD 7.6 billion) lower than planned when
the 2009 budget was formulated. There is wide agreement that
infrastructure spending, while good in the long run, will not do
much to deal with the short term problems represented by these

Bolster the Capital Markets

4. Another plan recently announced by the MOF addresses the capital
markets, especially the problems in the corporate bond market. The
plan, which totals about NIS 11 billion (USD 2.89 billion) to
strengthen the capital markets, has several aspects. The government
will provide a NIS 6 billion guarantee for the banking system to
encourage the expansion of credit. NIS 5 billion would also be
allocated to establish investment funds to assist companies which
have problems redeeming bonds by providing capital to the companies
and restructuring the debt and extending it over a longer period of
time. The MOF made clear in its announcement that these funds would
be available for companies who are active primarily in Israel and
employ most of their workers in the country. By establishing a
vehicle to help bond issuers reach repayment arrangements with the
issuers, the plan is intended to enable companies to meet their
commitments and thereby reduce the level of uncertainty in the
economy. Finally, the government intends to introduce tax
legislation that would encourage the flow of foreign investment into
Israeli capital markets, with a particular focus on the corporate
bond sector.

Banks Still Don't Want to Lend

5. Reaction to the capital markets plan has also been mixed. When
it was announced, the Tel Aviv Bond indices rose moderately.
However, many banks are wary of accepting government guarantees if
by doing so they are required to begin lending again and assume what
they deem to be unwarranted risks. Many bankers are simply not
interested in taking on any risk at all during such a volatile
period, even if the government is willing to share part of the

Corporate Bonds Coming Due

6. The 1 December issue of the Marker (a respected financial
newspaper) gave a breakdown of the amount of money that the most
prominent Israeli businessmen (the "tycoons") will have to pay to
redeem bonds coming due in the period from December 2008 through
December 2009. Nochi Danker needs to repay NIS 3 billion (USD 752
million), Eliezer Fishman NIS 1.1 billion (USD 275); Yitzhak Tshuva
NIS 696 million (USD 175 million) and Lev Leviev NIS 589 million
(USD 147 million). According the article, the amount of money
needed during this period to redeem or pay interest on corporate
bonds in aggregate will vary from a low of NIS 660 million (USD 165
million) in some months to as high as NIS 2 billion (USD 500
million) in others.

Pension Safety Net Caused Controversy

7. The other and most controversial plan recently presented by the
government is its proposal for providing a safety net to pension and
long-term fund (provident fund) savers. This proposal, coming as it
did in a period leading to national elections, became bound up in
political controversy, causing friction between Finance Minister
Bar-On, and Prime Minister Olmert, the Chairman of the Histadrut
Labor Federation, Ofer Eini, who threatened a general strike on the
issue, and the head of the Manufacturer's Association, Shraga Brosh.
Ultimately, a compromise safety net plan was accepted by the Prime
Minister and approved by the cabinet on December 14, with Finance
Minister Bar-On voting against. The plan was discussed in the
Knesset Finance Committee on December 15, with approval pending the
MOF's submission of its full details over the next three weeks.

Fischer Says to Stay Focused

8. The issue of providing a safety net for the pensions became the
main focus of the economic and political echelon in dealing with the
economic crisis. Governor of the Bank of Israel (BOI) Stanley
Fischer said on 9 December that precious time that could have been
used for the benefit of the economy was being wasted in wrangling
over the issue. His comment followed the disclosure of significant
tension between the Prime Minister's office and the Ministry of
Finance over the issue. Fischer said that important decisions
should not be delayed, and worried publicly that additional delays
in executing steps would erode the achievements of the economy and
the country's ability to successfully deal with the challenges that
it faces. He stressed that the financial crisis is a reality and is
not waiting for Israel to get its house in order. He added that the
government has formulated the steps that are necessary and what
remains is to implement them. Especially during this pre-election,
Fischer emphasized the importance of focusing on dealing with the
crisis; otherwise, the country will pay a heavy price.

MOF: Safety Net Unnecessary

9. The Finance Ministry does not believe that a safety net is
necessary or appropriate. Cumulative gains in pension funds from
2004-2007 totaled 36 percent, with average annual returns in the
eight percent range. In 2005, pension funds yielded about 12.5
percent on average. In comparison, average pension fund losses for
the first ten months of 2008 were only about 13 percent. It has
also been reported in the press that investors have recently reduced
their withdrawals from long term savings funds to pre-crisis levels,
a dramatic change from the near panic in the second half of
September and October. However, due to intense political pressure,
strike threats by the Histadrut, and unrelenting attacks in the
press, the Ministry came up with a plan, which was immediately
criticized from all directions. Most said that it was not expansive
enough--that it did not cover enough of the assets of enough people.
The Prime Minister and his bureau were among those pushing for a
more generous plan. Even Former Finance Minister and Likud
candidate for Prime Minister Binyamin Netanyahu consulted with
Olmert about establishing a more generous safety net for the
public's pension savings. Finance Committee Chairman Professor
Avishai Braverman, who was running for a spot in the Labor Party
Primaries, held the other economic plans hostage to the submission
of a pension plan.

Net Provides Limited Coverage

10. Once approved, the pension safety net plan will use closing
prices on November 30, 2008 as the base for performance measurement
purposes. It will not be retroactive to losses incurred prior to
that date. People between the ages of 57 and mandatory retirement
age (67 for men, 64 for women) with up to NIS 1.5 million (USD 380
thousand) in pension savings will be covered. The MOF chose that
limit after calculating that it was the amount a person needed in a
pension fund to be able to provide a provide a monthly payout of
about NIS 8000-the average monthly wage. However, only NIS 750,000
(USD 190 thousand) will be protected by the safety net, with the
protected amount going down for those with smaller pension savings.
The period of protection will be between 3 to 10 years, in
accordance with the age of the pension saver. If the person is 57
today, the protection will be in effect for 10 years, until
retirement. If the saver is 64 to 67, the period of protection will
be for 3 years. There have been many different assessments of how
much it will cost, ranging anywhere from little if the worst of the
economic crisis has already passed up to as much as NIS 17 billion
(about USD 3.9 billion). Some economists estimate that the cost of
the benefits of the plan itself will be near zero, with the only
costs involved resulting from the operation needed to administer it.

Why Should the Poor Subsidize the Rich?

11. In the 9 December issue of Ha'aretz, economic commentator
Nechemia Strassler criticized the plan, saying that the hundreds of
thousands of Israelis who do not have pension plans of their own
will be financing the bailout of those who do. He adds that setting
up a "Safety Net Administration" will also be expensive and
wasteful. Strassler and numerous other commentators agree with the
MOF view that the plan will be difficult to execute as it will
require careful examination of eligibility and data on pension
savings. Economists at the investment house Psagot-Ofek wrote in a
December 9 report that the pension savings plan should never have
seen the light of day. They said that only in Israel was there a
demand to supply a safety net for long-term savings, in spite of the
fact that losses in Israel were lower than in many other countries.
The reason for this is that people still remember that until a few
years ago, pension insurance was fully financed or subsidized by the
State, with pension holders invested primarily in special
government-designated bonds.

12. Others, such as several economists at Harel Insurance writing in
their in-house publication, said that the plan is reasonable and
good both from a macro and microeconomic perspective. They praised
its limited scope, saying that a more expansive plan with wide
government guarantees would have encouraged riskier investing in the
knowledge that the government would bail out those who lost money.
The Harel economists also lauded the MOF's ability to stand up to
the strong pressure to provide retroactive compensation for losses
suffered previously. They noted that this indicates that the MOF
will not let the budget deficit be significantly increased.

--------------------------------------------- --------
Finance Minister: Revamp Pension Investing Completely
--------------------------------------------- --------

13. Finance Minister Bar-On, speaking at a conference on December 9,
said that in the future the MOF would propose a comprehensive
regulatory reform that would define pension and long-term savings
investment tracks based on age, which would reduce the risk and
volatility of investments as a person ages. He said that it is
important to take a long term view and to understand that the
worldwide financial crisis obligates a deep global correction. This
holds true for Israel as well, where there is a need to revamp long
term savings structures and regulations.


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