FINANCE MINISTER NETANYAHU RESIGNS: ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 004880

SIPDIS

E.O. 12958: DECL: 08/08/2015
TAGS: ECON EFIN PGOV PREL ELAB EAIR IS GOI INTERNAL ECONOMY AND FINANCE GAZA DISENGAGEMENT
SUBJECT: FINANCE MINISTER NETANYAHU RESIGNS: ECONOMIC
IMPLICATIONS


Classified By: Deputy Chief of Mission Gene A. Cretz for Reasons 1.4 (b
) and (d)


1. (C) Summary: Minister of Finance Benyamin Netanyahu
resigned on Sunday, August 7th during the Cabinet session in
which the implementation of the first stage of disengagement
was approved. Within hours of Netanyahu's resignation the
stock market in Israel lost 5.3% of its value. Late Sunday
night, Prime Minister Sharon appointed political ally and
Vice Prime Minister & Minister of Industry, Trade, and Labor
(MOITL),Ehud Olmert to be acting Minister of Finance.
Sharon also announced that the framework of the 2006 budget,
including deficit and expenditure targets, would remain
unchanged. Although Netanyahu's move was motivated by
politics and his opposition to disengagement, his resignation
may have a significant impact on the Israeli economy and
economic relations with the U.S., at least in the short-term.
While acting Minister Olmert is likely to continue fiscally
conservative policies, it remains unclear how closely he will
follow Netanyahu's agenda, especially regarding key USG
policy objectives. (Political ramifications of Netanyahu's
resignation are reported septel.) End summary.

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BIBI'S GONE, BUT EVERYONE ELSE IS IN THE OFFICE
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2. (C) Shortly after Netanyahu's resignation Prime Minister
Sharon spoke with the three most senior officials at the
Ministry of Finance: Director General Yossi Bachar, Budget
Director Kobi Haber, and Taxation Authority Director Eitan
Rov. All three reportedly agreed to continue working in
their positions despite Netanyahu's resignation. Working
level contacts at the Ministry of Finance reported to work on
Monday morning, despite Netanyahu's sudden departure.
However, the mood among working level staff was clearly
anxious. One senior staffer commented that, "no one had
expected what happended on Sunday, and no one had prepared
himself." The Ministry of Finance staff expects to meet with
acting Minister Olmert as early as this afternoon. Olmert
met separately Monday morning with PM Sharon and the Director
of the Bank of Israel, Stanley Fisher, to discuss his new
responsibilities.

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IMPACT ON THE MARKETS
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3. (C) Within two hours of Netanyahu's resignation the TASE
(Tel Aviv Stock Exchange) lost more than five percent of its
value (equivalent to approximately a 500 point loss for the
Down Jones Industrial Average). PM Sharon attempted to calm
the markets by issuing statements that the framework for the
state budget, including deficit and expenditure targets,
would remain unchanged. He also moved quickly to announce
his appointment of Olmert as the acting Minister of Finance.
On Monday, the TASE gained back nearly two percent of its
value by mid-day trading. The foreign exchange market saw
the New Israel Shekel (NIS) lose less than 1% of it's value
against the dollar, and mid-day trading stabilized at the
rate of 4.5170/dollar.


4. (C) A prominent American banker in Israel said that
although Olmert had told him only ten days ago that he
supported Netanyahu's policy reforms, Olmert's real test will
be his willingness to remain focused on those reforms if the
GOI is thrown into an election season. He commented that
another litmus test would be Olmert's willingness to retain
key reform minded staff (Bachar, Rov, Haber) for the next six
months. In terms of the impact on the economy, he noted,
"this has put all deals on hold!" In his opinion the five
percent loss in the TASE was based on lack of investor
certainty about the continuation of economic reforms after
Netanyahu's departure. The true impact of Netanyahu's
resignation will "only be felt when the NASDAQ opens" (and
the impact on Israeli companies traded in the U.S. can be
measured).

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IMPACT ON THE BUDGET
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5. (C) Minister Olmert may make some minor changes to the
2006 State Budget before it is brought to a vote in the
Cabinet on Tuesday, August 9. Netanyahu's draft budget,
including the one percent increase in expenditures over 2005,
totals 272.4 billion NIS (about 60.5 billion USD). The 2006
budget calls for two dramatic cuts in expenditures -- NIS 1.5
billion from the Defense budget, and NIS 1.1 billion from the
budgets of other ministries. Olmert may consider reducing
the size of the cuts, but it is not clear how he could
finance such a change while maintaining deficit and
expenditure targets. The Labor Party Ministers have
threatened to vote against the budget in its current form if
it is brought before the cabinet on Tuesday.

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IMPACT ON US ECONOMIC INTERESTS
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6. (C) The GOI remains committed to the framework established
in the Loan Guarantee Agreement (LGA) with the USG. Sharon
reiterated publicly that the GOI would fulfill its
commitments to deficit and expenditure targets. Rani
Lobenstein, Senior Advisor to the Director General, told
Econoff August 8 that the GOI has not decided if it will be
necessary to go to the market and raise funds under the LGA
this year or not. (Note: The MoF was anxious to receive the
USG signed copy of the terms sheet in July so that they would
have "flexibility" in issuing bonds if necessary. In the
short-term the MoF may be hesitant to go to the market for
fear of creating a panic about the stability of the Israeli
economy. End note.)


7. (C) USG efforts to persuade Israel to improve protection
of intellectual property, particularly for pharmaceutical
products, have met with limited success during Minister
Olmert's tenure. In the course of negotiations over data
exclusivity Olmert attempted to achieve a "balance" of
interests (between US research based and local generic
pharmaceutical industries). However, when it became clear
that a negotiated solution was impossible, Olmert made minor
unilateral changes to the legislation and championed the bill
in the Knesset (despite the fact that it did not fully
address USG concerns). The patent term restoration (PTR)
legislation currently pending before the Knesset is supported
by Olmert and the MOITL. U.S. companies continue to lobby
against the PTR bill. As acting Minister of Finance Olmert
will assume implementation of the terms of the Loan Guarantee
Agreement. One of the key points under the rubric of
structural reform that the GOI agreed to abide by in June
2005 is to, "continue efforts to further strengthen IPR
protection in Israel" (Appendix 6, Section 4).


8. (C) As Minister of Industry, Trade, and Labor, Olmert has
not taken a formal position on Open Skies negotiations with
the USG. However, based on his support for Israeli industry
and the influence of El Al airlines, Olmert is unlikely to
advocate a rapid move towards liberalization of the aviation
sector. Netanyahu's staff at the Ministry of Finance also
agreed to include language in the LGA that calls for Israel
to, "consider entering into Open Skies negotiations with the
U.S. Government" (Appendix 6, Section 6). The policy staff
at MOITL are much less supportive of moving towards open
skies negotiations, as it would increase competition for El
Al.

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OLMERT AS MINISTER OF FINANCE, INDUSTRY, TRADE, AND LABOR
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9. (C) Comment. Upon assuming duties as acting Minister of
Finance (while retaining control of the Ministry of Industry,
Trade, and Labor) Ehud Olmert will in effect dominate the
economic policy of the GOI. The only other major economic
policy advocate will be Bank of Israel President Stanley
Fisher. Olmert is a Likud fiscal conservative who believes
that an open market economy is the best engine of economic
growth for Israel. However, Olmert will be forced to balance
not only the budget interests of competing ministries
(including his own) but also the economic interests of the
state with those of large Israeli companies. In previous
negotiations with USG and local industry stakeholders, Olmert
has pushed his agenda despite public criticism and USG
concerns. In contrast to Netanyahu, Olmert can be expected
to provide more economic assistance for the "disadvantaged
sectors."


10. (C) Comment continued. Olmert is a strong advocate of
disengagement, but his position on the future of the customs
union between Israel and Gaza is unknown. In the short-term
Olmert is likely to rely heavily on his current staff at the
MOITL for policy advice. Working relations between MoF and
MOITL staff are fair, with the most disagreements likely to
occur over economic policies that affect both the interests
of Israeli companies and the state budget. End Comment.

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