Israeli Debt for Sale On Wall Street

By Donald Neff

If you wondered what that full-page ad in the Wall Street Journal in late September was about, touting $4,851,035,715.00 worth of "government trust certificates" guaranteed by both Israel and the United States, rest easy—more or less. It was just Israel, with congressional approval and the underwriting skills of some of the financial world's giants, like Drexel Burnham Lambert and Manufacturers Hanover Securities Corp., refinancing some of its huge military debt to America.

Under the scheme, Israel should save around $100 million a year by profiting on the sale of long-term paper on Wall Street.

Like some American homeowners, farmers, and other borrowers, Israel and other countries got stuck in the late 1970s and early 1980s with unusually high interest rates on its American military loans. This was in the old days when Israel received its US military aid in the form of loans rather than the outright gifts it has received since 1985. These days Israel gets $1.8 billion a year in non-repayable military grants, plus $1.2 billion in economic aid, also in the form of grants. But before Israel managed to get completely on America's dole for its annual combined grant of $3 billion, it had borrowed billions of dollars. A total of $10.3 billion was still outstanding as of the beginning of this year, some of it at commercial or even lower-than-commercial concessionary interest rates. But, like many American private borrowers, Israel and other countries seeking US military aid a decade or less ago, when interest rates were unusually high, got hit with what amounted to usury. The United States socked Israel with up to 13.875 percent interest rates for some of its loans in that period, and in Turkey's case the rates reached an astonishing 14.7 percent.

All told, $5.6 billion of Israel's military debt is now at interest rates of 10 percent or above, according to analyst Clyde Mark of the Congressional Research Service. Egypt's debt of $10.6 billion contains $4.6 billion with interest above 10 percent, and Turkey, with a debt of $3.9 billion, owes $1.5 billion at the high rates.

Congressionally Approved Refinancing

For years Israel and other debtor nations ardently sought relief in the form of outright forgiveness of their debt. But, faced with ever-increasing pressure to reduce the soaring US national debt, not even the usually accommodating Congress would agree to a total giveaway to Israel. Instead, Congress approved a plan in last year's aid package to allow any military aid debts with rates above 10 percent to, in effect, be refinanced by allowing the debtor country to make a special offer on Wall Street.

This bit of financial legerdemain involved Congress allowing American financial institutions to participate for the first time in refinancing debts incurred under the Foreign Military Sales Credit Program and, equally important, permitting the US government essentially to back the Wall Street issue, practically assuring the issue will be a sure seller.

Congress gave the okay for the US government to guarantee 90 percent of the Wall Street offering. The Israeli government supposedly guaranteed the rest, but on close examination its guarantee was in turn backed by "a security interest in collateral, consisting of non-callable securities issued or guaranteed by the United States government, or derivatives thereof..." In other words, the buyer could hardly get a better commitment. It was almost like buying a US savings bond.

Under the scheme, Israel should save around $100 million a year by profiting on the sale of long-term paper on Wall Street, according to some estimates. But Israel is not likely to be the only country that will use its American connection to shave its debts. Already other countries are lining up to take advantage of the financial slight-of-hand, including Egypt, Jordan, Morocco, Turkey, and Tunisia.

Since the scheme presumably won't cost the American taxpayer any money, it is not a particularly objectionable form of aid. But it's the kind of deal that a lot of Americans like farmers, homeowners, and small businessmen stuck with usurious rates could have used before the banks closed in on them. Special deals by Congress are no stranger to Israel, however. It now enjoys a variety of unique arrangements that stretch its already bloated aid package well beyond even the raw figures cited above. Some examples:

Early release. Israel receives its economic aid in one payment at the beginning of the fiscal year for use as it pleases and without any US oversight. Aid is given to all other countries on a quarterly basis. Also, US aid for other states is usually targeted for special projects, which are closely monitored by US officials. There is no such monitoring of Israeli use of US aid, and Israel earns (and the US taxpayer loses) an estimated $40 million in interest as a result of getting its economic aid early in one lump sum.

It's the kind of deal that a lot of Americans like farmers, homeowners, and small businessmen could have Used before the banks closed in on them.

Offsets. Israel "requests" that US firms it selects to supply $1 million or more worth of weapons to Israel bought with US aid buy back from Israel goods or services equal to 25 percent of the contract. This kind of offset arrangement is fairly normal with foreign countries buying American goods with their own funds. It is extremely rare when the buyer is buying American goods using US aid funds.

Cash-flow financing. Israel, since 1974, has been allowed by Congress to use cash-flow financing, meaning it can order military equipment in advance, promising to pay with future aid it expects Congress to authorize. Normally, the US requires that the buyer set aside the full cost of the at the time of purchase. Under cash-flow, if Israel orders equipment co $100 million, it might have to pay only $50 million immediately, and set aside money to pay for the balance of the order. This frees funds which the Israeli government can then make other purchases, while deciding on anticipated future aid grants to pay for the full amount.

Drawdowns. Before all US aid to Israel was put on a grant b Israel was allowed to draw down the grant part of its aid allowance be touching the loan part. All other countries then and now must draw d proportionally both grants and loans. Israel profited from its special position by saving interest charges on the delayed loans, During 1982, for instance, it saved $419 million in interest costs by this method.

These are only the highly visible arrangements Israel enjoys from special relationship with the United States. Other concessions are scat throughout the budgets of numerous US agencies and departments include projects funded for research in agriculture, medicine, and science in Israeli universities, AID projects in Africa that are contracted with Israeli firms but paid for by the US, and secret research for the Strategic Deft Initiative.

Total US aid, military and economic, to Israel since 1948 had reached $42,733,900,000 by Sept. 30, 1988, the last day of the 1988 fiscal year Israel's share of all US aid distributed worldwide in 1987 equaled 37 percent, all of it in the form of grants, although Israel's 4.3 million people made up only one-tenth of one percent of the world's population. Beyond this, an additional total of nearly $15 billion has gone to Israel since establishment in the form of private transfers, i.e., outright contributions the purchase of bonds, and other donations by Americans.

What all this aid has meant for the average Israeli was summed up Edward Tivnan in his book The Lobby: "The engine that has run the Israeli economy for decades has been American aid ... The US pays for nearly all of Israel's military imports, which amount to one-half of its deft budget ... For the past several years, Israel has been importing more it has been exporting ... The result: Whatever import goods Israelis buying—cars, televisions, VCRs, appliances—it is foreign aid that is paying the bill ... Yet between 1973 and 1983, the standard of living in Is has risen 70 percent. In fact (and incredibly), Israelis were consuming 80 percent of what Americans consumed—while earning a fraction of average US income. The Israeli Economist reported in 1984 that it had the highest per capita rate of VCRs in the world."

In short, American aid has not gone primarily to support Israel's safety, but to finance the increasingly lavish lifestyle of its citizens. W American political leaders seek to reduce the national deficit by cuts in crop support, jobretraining, andeven school lunch programs, American aid is being sent without debate to Israel in ever-larger amounts to crease Israel's already extraordinarily high standard of living.

Donald Neff's latest book, Warriors Against Israel, has just been published by Amana Books of Brattleboro, VT. Available from the AET Book Club, it is the concluding volume in his Warriors trilogy on US-Israeli affairs from 1956 to 1973. The first two volumes, also available from the AET Book Club, are Warriors at Suez and Warriors for Jerusalem.