The Real Reasons for the Israeli Loan Guarantee Demand

By Frank Collins

There is no question that Israeli Prime Minister Yitzhak Shamir is desperate for the $10 billion in loan guarantees that he is so angrily demanding. According to his Finance Ministry's figures, Israel will have to borrow some $20 billion during the next five years, assertedly, to finance the absorption of a total of one million immigrants. Estimates by Shamir have put the total even higher—at $40 billion.

It is evident that, if matters are allowed to drift, the $10 billion in loan guarantees being demanded may be just the down payment to be followed by later calls for new and bigger economic assistance that, in the end, would be quite unsustainable, both economically and politically.

The folly of continuing the present US program of support for Israel into the indefinite future becomes obvious if the demands for support are scaled up to an economy the size of that of the United States. The proposed support for Israel in each of the next five years includes the existing approximately $4 billion per year in grants and other aid plus the demanded $2 billion in loan guarantees. Scaled up by the ratio of the gross national products of the United States and Israel, if the loan guarantees were to be granted, the total support level for the next five years would be equivalent to roughly $3 trillion, nearly equal to the national debt of $3.5 trillion of the United States.

The present impasse is the endpoint in a growing Israeli dependency on US subsidies. Since the time of the founding of the state, the Israeli economy had been dependent upon large inputs of money from abroad, first from the generosity of diaspora Jews and reparations from Germany and now grants from the United States. The US alone has provided a total of $53 billion in assistance since 1949 according to the Congressional Research Service. As in some other cases of dependency, the demand seems to grow in proportion to the hand-outs, until the dependency reaches overwhelming proportions.

Through the years the money from abroad enabled Israel to create an economy dependent on a system of subsidies and hand-outs to all its sectors. The subsidies, both open and disguised, flowed to Israeli institutions ranging from the huge Histadrut trade union confederation with its industrial subsidiaries to the kibbutz communes and the moshav cooperatives. By these means, 80 percent of the economy is government controlled. The system of subsidies tolerated inefficiencies that were often covered by additional borrowing by the various economic sectors. This borrowing grew until it reached a critical level in 1987-1988, when a limited financial overhaul took place.

Demand seems to grow in proportion to the hand-outs.

Some Israelis are objecting to the economic dependency of the country. One of these, perhaps unexpectedly, is Yisrael Harel, chairman of the Council of Settlements, who wrote, "Only a program that will change the parasitical economic system, encourage private enterprise and reward entrepreneurship and diligence will bring independence to the state. No country in the world needs such independence as urgently as the state of Israel" (Jerusalem Post, September 19, 1991).

As Business Week (Oct. 7, 1991) noted, the most injurious effect of the dependency of Israel is that the subsidized economy, shored up by the heavy inputs of money from abroad, enables the government to assume domination of the economy. As a result, under both Labor and Likud, the economy has been governed by politics and ideology rather than by considerations of economic efficiency and public interest.

In this perspective, it should be apparent that the objectives of the Likud government have less to do with the welfare of the Soviet Jewish immigrants than with the political aims of Israel's governing elite. For example, instead of building adequate housing in central Israel where the Soviet Jews want to live and the limited jobs available to them are located, the Housing Ministry under Ariel Sharon is frantically building heavily subsidized housing in the occupied territories. The transparent motive is to settle masses of Israeli Jews in the West Bank, the Gaza Strip and the Golan Heights in order to obstruct the coming peace negotiations.

According to recent articles by Bill Hutman and Jon Immanuel in the Jerusalem Post, 19,000 housing units are being built this year in the occupied territories. The estimated cost will be NIS 3.75 billion ($1.56 billion), including a network of roads, the extension of electric power to points far from generating stations and the development of other public utilities. The cost is far greater than if the housing were built in central Israel.

"Uninhabited Eyesores"

Commencing last July 1, Soviet Jewish emigrants were provided with passports allow them to go to countries other than Israel. In view of the fact that Israel's Soviet Jewish immigrants are largely unemployed and that very few have been able to obtain positions in their profession or skill categories, it is hardly surprising that their rate of immigration to Israel immediately dropped in July. It is now highly dubious whether one million Soviet Jews will finally immigrate to Israel. The Jerusalem Post editorially laments, "Unless government and business can persuade potential investors that Israel's pool of talent offers unequalled opportunities for lucrative investment, the housing units rising all over the country risk becoming uninhabited eyesores" (Aug. 27, 1991).

Whether investment capital can be attracted to Israel in the present economic environment is questionable. In an article by Daniel Doron headlined "Why Foreign Investors Stay Away" (Jerusalem Post, Sept. 6, 1991), the complaint is made, "Bona fide foreign businessmen who have considered investing in Israel say they see soon enough that Israel has a different 'business culture' which they do not comprehend. "

Originally, the Israeli demand for the $10 billion in loan guarantees involved only housing for the Soviet Jewish immigrants. More recently, the ground has shifted. The Israeli government now intends to devote only 20 to 25 percent of the money to housing for the Soviet Jews, the rest going into "job creation," mainly money for private entrepreneurs and public works. The latter two items could lead to one of the great boondoggles of history. So far the main government efforts in "job creation" have been in subsidizing one-half of the wages of newly hired Soviet Jewish employees for six months and in plans for flooding private industries and public institutions with subsidized Soviet Jewish employees.

Beyond the political motivation for building settlements in the occupied territories, the real purpose behind the Israeli demand for $10 billion in loan guarantees is an attempt to rescue the Israeli economy from its predicament following long years of government mismanagement. One symptom of the low state of the economy is that the government debt servicing costs are the largest item in the Israeli budget—40 percent. It is dubious that the remedy is to borrow more money. Borrowing more money to cover accumulating interest obligations is a road to ultimate bankruptcy typically taken by Third World countries.

The present foreign debt of the government of Israel is $16.9 billion, with interest of about $1.5 billion per year. The financing of $10 billion in additional debt at an estimated interest rate of 8.5 percent would raise the interest payable to $2.35 billion.

The Kasten-Inouye amendment introduced into the Senate Sept. 10, if passed, would provide standard terms for the repayment of US-guaranteed 30-year loans. The total repayment with interest as prescribed under this amendment would amount to $29.3 billion or almost three times the amount of the original $10 billion loan.

There is an odd provision in the Kasten-Inouye amendment that would enable the Israelis to circumvent the payment of debt service costs on at least part of the loan by as much as 14 years. This arrangement is now in force for even longer-term loans in the case of the US housing loan guarantee for $400 million provided Israel this year.

One-third of the $400 million notes covered by the US guarantee of 1991 are being advertised for sale in the form of zero coupon bonds at 8.5 percent interest and maturing in 2008 and 2010. With "zero coupon" bonds, the interest, instead of being periodically paid out, compounds until the bonds' maturity date. At compound interest, the total interest on the $133 million in zero coupon bonds will be $719 million at maturity. Added to the original principal ' this represents nearly a five-fold increase over the original loan. Were the bonds ordinary coupon bonds at simple interest, the total interest in 19 years would have been $215 million.

In the meantime, Israel will get the entire $400 million in principal, but for $133 million of this, will not have to pay one cent in debt service costs until the bonds mature. The $133 million in Israeli hands is like found money with nothing to pay out for 19 years. An American trying to make such an arrangement for a loan would be laughed out of the bank.

As far as the US Treasury is concerned, zero coupon bonds by their very structure increase the danger of their default. Ordinary coupon bonds are usually partially or completely paid off by their maturity date.

A Loosening of Terms

With the increasing influence of the pro-Israel lobby in Congress, prior to this September, there was a loosening of the terms under which loan guarantees are provided. A little-publicized US-loan guarantee of $4.851 billion provided in 1988 to assist Israel in refinancing its high-interest military debts covered coupon bonds maturing in 1995, 1996 and 2001, periods of 7,8 and 13 years, compared to the 17- and 19-year maturities of the more recent $400 million loan guarantees, and the 30-year maturities for the proposed $10 billion. Obviously, longer term bonds carry correspondingly larger payments of total interest. But, more importantly, the guarantees of 1988 covered coupon bonds only. Finally, the earlier loan guarantees provided for a 10 percent "set aside" by the US Treasury Department to cover risk. For the 1991 loan guarantees, the set aside was only 0.5 percent.

Israeli propaganda claims that the loan guarantees will cost the US taxpayer nothing since the Israelis have never defaulted on a loan in the past. The Israeli argument ignores the fact that the previous annual US loans to Israel now have been supplanted by grants. It also ignores the Cranston amendment stating "that it is the policy and intention of the United States that the funds provided in annual appropriations for the Economic Support Fund which are allocated to Israel shall not be less than the annual debt repayment (interest and principal) from Israel to the United States Government."

Consider the enormity of a debt of $10 billion, plus accumulated interest of $19.3 billion, to a country as small as Israel with its present annual GNP of $53 billion and population of, at most, 5 million. This represents $5,860 for each and every Israeli, $23,440 for a family of four, in addition to their already existing heavy debt burden. Only the wildest dreams of Israeli population and GNP growth could lead to conclusions other than the inevitability of default.

On default by Israel, the US would have to assume liability for the payment of the private debts with interest. The debt would be wiped out as far as Israel is concerned, but under present US deficit financing, it would be added to the US national debt, to go on accumulating compound interest at the prevailing US Treasury bondrates.

Frank Collins is a free-lance journalist specializing in the Middle East.