REFORM MAVEN LEAVING FINANCE MINISTRY

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 004176

SIPDIS

NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE,
BELGRADE; EB/FO FOR DIBBLE; EB/OMA FOR GARRY; NSC FOR
ABRAMS, DORAN, WATERS; TREASURY FOR HIRSON

E.O. 12958: DECL: 10/19/2016
TAGS: ECON EFIN PGOV IS
SUBJECT: REFORM MAVEN LEAVING FINANCE MINISTRY

Classified By: Economics Counselor William Weinstein for reasons 1.4 b
and d.

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Yossi Bachar to Quit MoF
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1. (C) Yossi Bachar, the Director General of the Ministry of
Finance (MoF) announced on October 16 that he will be leaving
his post at the ministry. He agreed to Finance Ministry
Hirchson's request to stay on the job until the 2007 budget
is passed by the Knesset, which should happen by the end of
the year, but may take until sometime in early 2007.
Bachar's Senior Advisor, Rani Loebenstein, told Econ
Counselor on October 19 that Bachar has served as Director
General under three Prime Ministers (Netanyahum Sharon, and
Olmert) and has been on the job longer than most previous MoF
Directors General. He said that Bachar, whose name is
closely associated with Israel's economic reform program of
recent years and also the effort to combat poverty, felt that
the time had come for a "change" and that he preferred to
leave when he was still "on top" rather than wait to see his
handiwork dismantled by a more liberal spending policy.
Bachar will likely engage in consulting during the year long
"cooling off" period required before a former official is
allowed to work directly for a company in a field in which he
previously exercised influence. He refused to speculate
regarding a possible successor to Bachar, saying simply that
the choice of a new DG was entirely up to the minister.

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Who Will Champion Fiscal Restraint?
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2. (C) Loebenstein expressed ambivalence regarding the
strength of the government's continued commitment to fiscal
restraint. He noted that the coalition is weak and that it
is not clear that it would be able to withstand the demands
to raise spending more than is prudent. In response to Econ
Couns query as to who will now become the new "champion" of
reform and fiscal restraint, Loebenstein had no answer, and
glumly said "the new DG." He added, however, that Budget
Chief Kobi Haber strongly advocates fiscal restraint, and
would continue to push for responsible economic policies. As
for Finance Minister Hirchson himself, Loebenstein
characterized him as not having particularly strong views one
way or another, indicating that the Prime Minister and the
MoF professional staff would more decisively influence
policy.

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Israel-Palestinian Banking Solution in Sight
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3. (C) On the issue of Israeli-Palestinian correspondence
banking, Loebenstein said that the Israeli banks had extended
their deadline for resolution of the problem to November 1.
He said that the Minister of Finance and the Governor of the
Bank of Israel had both agreed to a solution, and expected
that objections raised by Yehuda Shaeffer, the Chief of the
Anti-Money Laundering Unit at the Ministry of Justice would
be overcome by sometime next week. Loebenstein said that if
Israeli banks follow the procedures delineated in the
agreement, they will not be held liable if any of their
financial transactions with Palestinian banks are somehow
tied to terrorism.

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Israel Flexible on JEDG Timing/Location
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4. (C) Regarding the U.S. - Israel Joint Economic Development
Group, Loebenstein indicated that the Israeli side was very
flexible as to timing and location. While the Israelis would
prefer to keep to the yearly site rotation between Washington
and Jerusalem - which would put the meeting in Jerusalem this
time - he said that meeting in Washington would also be
acceptable. On timing, December works well, but Israel would
not object if the U.S. wanted to push the meeting off into
next year. Loebenstein said that the Israeli side has
already begun working on the substance of the meeting and
suggested that it cover four main topics: the macroeconomy,
the Loan Guarantee Agreement term sheet, the 2007 economic
plan, and the cost of the Lebanon War.


5. (C) Comment: The departure of Bachar is a blow to the
GOI's successful policy of fiscal restraint, and will leave
Bank of Israel Governor Stanley Fischer as its only powerful
advocate in the senior echelon. Without a strong figure such
as Bachar in the pivotal position of MoF DG, the weakness of
the present coalition and future attempts to shore it up
could result in higher spending levels which would erode the
accomplishments of previous governments. It also casts doubt
on the GOI's ability to follow through on its reform program
in other spheres as well, such as privatization and banking
and capital market reform. The choice of Bachar's successor
will be one of the most significant appointments made by the
Olmert government and will be key to determining the future
direction of the Israeli economy. End comment.

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