A while ago I met – on their request – with US Administration economists in Washington who deal with Israeli issues. These are serious people who are well familiar with our economy and highly impressed by it. Towards the end of the conversation, one of them asked: What about the loan guarantees? And all of us burst out in laughter.
It was a healthy laughter. At the height of the 2002 recession, the Israeli government approached the US Administration and asked that it approve loan guarantees that would enable Jerusalem to raise capital internationally. In exchange for these guarantees, Israel was asked to pay a risk premium in advance.
Back then already, Israel did not really need to raise capital abroad. A surplus was emerging in our international balance of payments that only grew in later years. The request from America was made for reasons of political backing and display of trust and support. The guarantees were approved in April 2003 to the tune of $9 billion over three years.
Since October 2004, Israel has made no use of the guarantees, whose validity was extended from time to time. A total of $3.8 billion in unused loan guarantees are just lying there.
A year ago, on the eve of the elections, both Netanyahu and Barak spoke about the possibility of using the guarantees as a lever that would pull the economy out of recession. After the elections they examined the statistics and discovered that Israel has a huge foreign currency surplus relative to our economy’s size. The notion of using the guarantees was abandoned, and rightfully so.
As of September 2009, Israel’s foreign debt totals $28 billion. Meanwhile, the State of Israel’s foreign currency reserves total $60 billion. Most of them are invested in US government bonds. That is, the Israeli government’s foreign debt stands at -$32 billion. Or in other words, at this time we, Israelis, are financing America’s debts – and not the other way around.
Disconnected from realityChina is doing the same to a much greater extent, but the principle is the same: States with a foreign currency surplus, such as Israel or China, are financing states that are facing a deficit, such as the US.
Moreover, objectively speaking, Israel should have been able to raise capital abroad while paying a lower interest than the US. The ratio between net government debt and GDP – which serves as an indication of a state’s financial stability – is lower in Israel than in America. However, no credit rating company out there would lower America’s rating while boosting Israel’s. These firms are dependent on the US Congress, and recently also on large clients from oil states.
Israel initially asked for loan guarantees at the end of the Shamir government’s term in office, and got them only after Yitzhak Rabin was elected as prime minister in 1991. The first guarantees were to the tune of $9 billion and Israel used them fully, even though much of the money remained in the government’s bank accounts for years. We had no use for them. So why did we take them? “It was embarrassing to give them up after the intense lobbying effort in Congress,” a Treasury official explained.
At this time too, the Israeli government is embarrassed to tell the US administration what needs to be said: Please, take back your loan guarantees. In the coming decade we probably will not need them, while you may very well need them. The Administration economists I met know this well.
People who still speak about “US economic pressure on Israel via loan guarantees” are completely disconnected from reality. Israel is now helping the US pay its deficits, and not the other way around. This is why we were laughing, the American economists and myself, when the issue of loan guarantees came up in our conversation. I was laughing happily; they were laughing somewhat sadly.