Identifier
Created
Classification
Origin
05TELAVIV5951
2005-10-03 13:24:00
SECRET
Embassy Tel Aviv
Cable title:  

MINISTRY OF FINANCE DG BACHAR CREDITS U.S. LOAN

Tags:  EAID ECON IS PREL ECONOMY AND FINANCE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
S E C R E T SECTION 01 OF 03 TEL AVIV 005951 

SIPDIS

E.O. 12958: DECL: 10/02/2015
TAGS: EAID ECON IS PREL ECONOMY AND FINANCE
SUBJECT: MINISTRY OF FINANCE DG BACHAR CREDITS U.S. LOAN
GUARANTEES FOR ISRAELI ECONOMIC STRENGTH

Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (B
) and (D)

-------
Summary
-------

S E C R E T SECTION 01 OF 03 TEL AVIV 005951

SIPDIS

E.O. 12958: DECL: 10/02/2015
TAGS: EAID ECON IS PREL ECONOMY AND FINANCE
SUBJECT: MINISTRY OF FINANCE DG BACHAR CREDITS U.S. LOAN
GUARANTEES FOR ISRAELI ECONOMIC STRENGTH

Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (B
) and (D)

--------------
Summary
--------------


1. (C) In a September 29 meeting with Ambassador Jones,
Minister of Finance Director General Joseph Bachar, was very
upbeat about the prospects for the Israeli economy. While
cautious about predicting that the good times would continue,
he noted the positive effect of the calm of the past year,
and said that the markets now give credibility to the GOI,s
consistent policy of fiscal restraint. He said that the
policy will not change, despite election pressures. He gave
substantial credit for Israel,s recent economic success to
the Loan Guarantee Agreement (LGA) signed with the U.S. in

2003. Saying that this was not yet public information,
Bachar confided that the 2005 deficit may come in at about 3
percent, even though the LGA terms were loosened this year to
allow for a 3.4 percent deficit due to disengagement
expenses.


2. (S) Summary Contd. Bachar noted that he had a
relationship of complete trust with PA Finance Minister
Fayyad. He said that he understood the importance to Fayyad
of maintaining the customs envelope, but that doing so
depended on full control being established over the
Philadelphi Road. He added &off the record8 that Minister
Olmert had met with Fayyad earlier in the day, noting that
this was the first time any Israeli Finance Minister had met
personally with him. On U.S. disengagement aid, he said the
issue was now on hold, and would be picked up again before
the end of the year. End Summary.

--------------
Successful Eurobond Issuance
--------------


3. (C) The Ambassador began the meeting by congratulating
Bachar on the successful Israeli Eurobond issuance the
previous day. Bachar said that he was very gratified by the
market,s reaction, and contrasted it with the days when, in
the depths of the intifada, Israel could not borrow money in
the international markets. He explained that the Eurobond
issuance was successful beyond expectations. Rather than
using another tranche of the U.S. loan guarantees, the GOI,s

investment bankers had suggested going to the European market
in order to show an active presence in that market. The
original plan had been to float a 400 million Euro issuance.
However, the market demand turned out to be so great, up to 4
billion Euros, that the GOI increased the issuance to 750
million Euros. The interest rate was 3.78 percent, .53 point
above the LIBOR (London Interbank Offered Rate),and the term
was ten years, three years longer than Israel had ever
previously achieved in this market. In response to a
question from the Ambassador regarding Israel,s intention to
use the LGA in the future, Bachar stated that the GOI fully
intends to borrow against it in 2006, and that any borrowing
in Europe would not be at the expense of the North American
market.

--------------
U.S. Gets the Credit for Israeli Success
--------------


4. (C) Bachar said that the successful bond issuance is a
reflection of the GOI,s credibility in the international
markets, which is a product of its consistent and clear
economic policy over the past several years. He noted that
when Sharon,s government took office, it adopted a new
economic agenda, and implemented it consistently, with the
backing of the U.S. He was particularly forthright in giving
the U.S. a great deal of credit for the success of the policy
of fiscal restraint, noting that the 2003 LGA &gave us a
list of tasks to do, and to report back on.8 He said that
it had become a mantra for MoF representatives ) even in
Cabinet meetings - to say that they would like to be able to
spend more, but the U.S. LGA terms do not allow it. The LGA,
according to Bachar, gave rise to the policy of fiscal
discipline, and the GOI is fully committed to continuing it.

-------------- ---
Election Pressures Will Not End Fiscal Restraint
-------------- ---


5. (C) When the Ambassador asked about how elections might
affect the government,s ability to adhere to its present
fiscal policy, Bachar said that when former Minister
Netanyahu resigned, both the Prime Minister and Acting
Minister Olmert called to ask him to continue in his post,
and to continue the same policy. He pointed out that the MoF
has a &professional8 staff not subject to political
pressures, and that only the Minister is a political
appointee. While noting that Olmert has been part of
Sharon,s government since its inception and has always
supported its fiscal policy, he indicated that under Olmert,
there may be an added emphasis on social welfare. He
clarified, however, that any differences were in the realm of
nuance rather than on fundamentals.

-------------- --
Economy Vulnerable to Deterioration in Security
-------------- --


6. (C) Asked by the Ambassador about a disengagement &peace
dividend,8 Bachar responded that anything that contributes
to an &upbeat feeling8 among the people is positive for
the economy. He said that the relative calm of the past year
contributed in no small part to the economic recovery, and
that the careful way the disengagement was handled generated
a feeling of confidence. In a note of caution, he added that
the economy continues to be vulnerable to a deterioration in
security, citing the recent violence in Gaza as worrisome.
He said that Israelis are naturally skeptical about positive
developments, saying that we have been through the New
Middle East8 before,8 specifically during the Oslo years.

-------------- --
We,ll Help the PA as long as it Doesn,t Hurt Us
-------------- --


7. (C) The Ambassador explained the various steps the U.S.
is taking to push the Palestinian Authority (PA) to act
against the violence, noting General Ward,s meeting with
Minister Nasser Yusuf the day before, and Secretary Rice,s
phone contact with President Mahmoud Abbas. He stressed the
importance of doing everything possible to strengthen Abbas
both with regard to the passages and in the realm of
economics. He noted that the Wolfensohn team has estimated
that there is $750 million in international donations to be
spent before year end, but that the security environment
makes it difficult. Bachar responded that &we will help as
much as possible, as long as it doesn,t hurt us.8 He added
that he had heard the PM repeat the same phrase on numerous
occasions. Making the situation even more difficult,
according to Bachar, is the fact that it is not politically
feasible for the PA to be seen as being directly aided in any
way by the GOI. He then noted that the GOI differed with
many in the international community, including members of the
Wolfensohn team, regarding the number of Palestinians allowed
to work in Israel. He said that while others prefer a more
&liberal8 GOI policy on the issue, the GOI wants only a
limited number to be allowed entrance for now, and to reduce
that number to zero by 2008.

--------------
Complete Trust in Fayyad
--------------


8. (S) Bachar then went on to say that the basic problem
between the two sides was that the lack of trust prevented
agreement even on the simplest of things. However, he said
that he and his staff had complete trust in PA Finance
Minister Fayyad and excellent relations with him. He noted
that he and Fayyad had been able to accomplish many difficult
and complicated things together over the past several years,
and that Israel started transferring PA money to him in 2003
- during the time of the worst violence between the
Palestinians and the Israelis. In a humorous aside, Bachar
wished that his relations with others in the GOI were as good
as his relations with Fayyad. In an off the record comment,
he then added that just that morning, Minister Olmert met
Fayyad face-to-face, in the first such meeting between Fayyad
and a sitting Israeli Finance Minister.

--------------
Customs Envelope Important to Fayyad
--------------


9. (C) Bachar said he recognized that the preservation of
the customs envelope is very important to Fayyad, but unless
full control is established over the Philadelphi Road, the
Israeli economy would continue to be damaged, and it would be
hard to maintain the envelope ) which is why the GOI wants
goods to pass through Kerem Shalom in the short term. He
added that Fayyad prefers that Israel continue to collect
customs duties for the PA, and that it is also a political
imperative for the PA to not separate Gaza economically from
the West Bank. Bachar indicated that once the West Bank
fence is completed, it would be possible to connect the two
and treat them as a single economic entity. He then said
that his overall philosophy is that &economics drives
everything (almost). If the Palestinians are better off, it
will be a catalyst to help8 (move the peace process
forward).

-------------- --------------
U.S. Post-Disengagement Assistance on Back-Burner
-------------- --------------


10. (C) The Ambassador noted continued U.S. support for
post-disengagement assistance to Israel, and asked about the
status of the Israeli response to the USG,s technical
questions on the Israeli request. Bachar said that, given
the Katrina catastrophe, it was not the right time for Israel
to press ahead with the request. The GOI had therefore not
yet fully addressed the U.S. questions, but would have a
response by early November.

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