R 171536Z DEC 08
FM AMEMBASSY TEL AVIV
TO SECSTATE WASHDC 9663
INFO ARAB ISRAELI COLLECTIVE
NSC WASHDC
DEPT OF TREASURY WASHDC

UNCLAS TEL AVIV 002833 
 
 
NEA/IPA FOR GOLDBERGER, LENTZ ZIMMER; EEB/IFD FOR SNOW, JACOBY; 
TREASURY FOR BALIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ELAB IS
SUBJECT: ISRAELI ECONOMIC CRISIS PLANS 
 
REFS: 1) Tel Aviv 2753 2) Tel Aviv 2739 3) Tel Aviv 2636 4) Tel Aviv 2597 
 
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Summary 
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¶1. The Ministry of Finance (MOF) has recently come out with several 
plans to deal with a serious economic slowdown in Israel caused by 
the global financial crisis.  The first plan introduced by the MOF 
is aimed at accelerating economic growth, with a primary emphasis on 
investment in infrastructure.  Another plan recently announced by 
the MOF addresses the capital markets, especially the problems in 
the corporate bond market.  The final and most controversial plan 
recently presented by the government is its proposal for providing a 
safety net to pension and long-term fund (provident fund) savers. 
The first two plans have been fully approved by the cabinet and the 
Knesset Finance Committee and await full Knesset approval.  After 
much wrangling and political drama, the cabinet approved the pension 
safety net plan, which now awaits action in the Knesset Finance 
Committee.  End Summary. 
 
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Accelerate Infrastructure Building 
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¶2. The first plan introduced by the MOF aims to accelerate economic 
growth, mainly through investment in infrastructure.  The plan calls 
for spending of NIS 21.7 billion (USD 5.7 billion) on basic 
infrastructure projects, especially transportation and water.  The 
plan also addresses professional training and education.  It 
increases the budget of the chief scientist, establishes a loan fund 
for medium sized businesses, and expands a similar type of small 
business loan fund.  In addition, there are numerous other 
provisions, such as one allowing businesses with sales turnover of 
less than NIS 15 million to report and pay Value Added Tax on a 
bimonthly basis, instead of monthly.  The plan also includes a 
provision to help exporters obtain financing. 
 
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Big Spending Has Little Short-Term Impact 
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¶3. Economists and analysts have generally welcomed the spending 
plans.  Bank Leumi economists have commented in their newsletters 
that government intervention and an expansive monetary policy are 
needed to accelerate economic activity.  However, they note that the 
infrastructure spending portion of the government's plan will 
strengthen the economy in the long run and not do much for the short 
and medium terms, which the plan is ostensibly intended to address. 
Bank Leumi's growth forecast for 2009 is around 2 percent, with most 
other economists coming in with forecasts in the same general area-- 
from 1.7-2 percent.  With population growth expected to continue at 
about 1.7 percent, this puts GDP per capita growth at close to zero. 
 Most economists are also forecasting a significant decline in state 
tax revenues in 2009 due to the decline in economic activity.  Ofer 
Klein of Harel Insurance forecasts that state tax revenues could be 
as much as NIS 30 billion (USD 7.6 billion) lower than planned when 
the 2009 budget was formulated.  There is wide agreement that 
infrastructure spending, while good in the long run, will not do 
much to deal with the short term problems represented by these 
figures. 
 
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Bolster the Capital Markets 
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¶4. Another plan recently announced by the MOF addresses the capital 
markets, especially the problems in the corporate bond market.  The 
plan, which totals about NIS 11 billion (USD 2.89 billion) to 
strengthen the capital markets, has several aspects.  The government 
will provide a NIS 6 billion guarantee for the banking system to 
encourage the expansion of credit.  NIS 5 billion would also be 
allocated to establish investment funds to assist companies which 
have problems redeeming bonds by providing capital to the companies 
and restructuring the debt and extending it over a longer period of 
time.  The MOF made clear in its announcement that these funds would 
be available for companies who are active primarily in Israel and 
employ most of their workers in the country.  By establishing a 
vehicle to help bond issuers reach repayment arrangements with the 
issuers, the plan is intended to enable companies to meet their 
commitments and thereby reduce the level of uncertainty in the 
economy.  Finally, the government intends to introduce tax 
legislation that would encourage the flow of foreign investment into 
Israeli capital markets, with a particular focus on the corporate 
bond sector. 
 
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Banks Still Don't Want to Lend 
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¶5. Reaction to the capital markets plan has also been mixed.  When 
it was announced, the Tel Aviv Bond indices rose moderately. 
However, many banks are wary of accepting government guarantees if 
by doing so they are required to begin lending again and assume what 
they deem to be unwarranted risks.  Many bankers are simply not 
interested in taking on any risk at all during such a volatile 
period, even if the government is willing to share part of the 
risk. 
 
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Corporate Bonds Coming Due 
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¶6. The 1 December issue of the Marker (a respected financial 
newspaper) gave a breakdown of the amount of money that the most 
prominent Israeli businessmen (the "tycoons") will have to pay to 
redeem bonds coming due in the period from December 2008 through 
December 2009.  Nochi Danker needs to repay NIS 3 billion (USD 752 
million), Eliezer Fishman NIS 1.1 billion (USD 275); Yitzhak Tshuva 
NIS 696 million (USD 175 million) and Lev Leviev NIS 589 million 
(USD 147 million).  According the article, the amount of money 
needed during this period to redeem or pay interest on corporate 
bonds in aggregate will vary from a low of NIS 660 million (USD 165 
million) in some months to as high as NIS 2 billion (USD 500 
million) in others. 
 
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Pension Safety Net Caused Controversy 
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¶7. The other and most controversial plan recently presented by the 
government is its proposal for providing a safety net to pension and 
long-term fund (provident fund) savers.  This proposal, coming as it 
did in a period leading to national elections, became bound up in 
political controversy, causing friction between Finance Minister 
Bar-On, and Prime Minister Olmert, the Chairman of the Histadrut 
Labor Federation, Ofer Eini, who threatened a general strike on the 
issue, and the head of the Manufacturer's Association, Shraga Brosh. 
 Ultimately, a compromise safety net plan was accepted by the Prime 
Minister and approved by the cabinet on December 14, with Finance 
Minister Bar-On voting against.  The plan was discussed in the 
Knesset Finance Committee on December 15, with approval pending the 
MOF's submission of its full details over the next three weeks. 
 
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Fischer Says to Stay Focused 
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¶8. The issue of providing a safety net for the pensions became the 
main focus of the economic and political echelon in dealing with the 
economic crisis.  Governor of the Bank of Israel (BOI) Stanley 
Fischer said on 9 December that precious time that could have been 
used for the benefit of the economy was being wasted in wrangling 
over the issue.  His comment followed the disclosure of significant 
tension between the Prime Minister's office and the Ministry of 
Finance over the issue.  Fischer said that important decisions 
should not be delayed, and worried publicly that additional delays 
in executing steps would erode the achievements of the economy and 
the country's ability to successfully deal with the challenges that 
it faces.  He stressed that the financial crisis is a reality and is 
not waiting for Israel to get its house in order.  He added that the 
government has formulated the steps that are necessary and what 
remains is to implement them.  Especially during this pre-election, 
Fischer emphasized the importance of focusing on dealing with the 
crisis; otherwise, the country will pay a heavy price. 
 
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MOF: Safety Net Unnecessary 
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¶9. The Finance Ministry does not believe that a safety net is 
necessary or appropriate.  Cumulative gains in pension funds from 
2004-2007 totaled 36 percent, with average annual returns in the 
eight percent range.  In 2005, pension funds yielded about 12.5 
percent on average.  In comparison, average pension fund losses for 
the first ten months of 2008 were only about 13 percent.  It has 
also been reported in the press that investors have recently reduced 
their withdrawals from long term savings funds to pre-crisis levels, 
a dramatic change from the near panic in the second half of 
September and October.  However, due to intense political pressure, 
strike threats by the Histadrut, and unrelenting attacks in the 
press, the Ministry came up with a plan, which was immediately 
criticized from all directions.  Most said that it was not expansive 
enough--that it did not cover enough of the assets of enough people. 
 The Prime Minister and his bureau were among those pushing for a 
more generous plan.  Even Former Finance Minister and Likud 
candidate for Prime Minister Binyamin Netanyahu consulted with 
Olmert about establishing a more generous safety net for the 
public's pension savings.  Finance Committee Chairman Professor 
Avishai Braverman, who was running for a spot in the Labor Party 
Primaries, held the other economic plans hostage to the submission 
of a pension plan. 
 
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Net Provides Limited Coverage 
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¶10. Once approved, the pension safety net plan will use closing 
prices on November 30, 2008 as the base for performance measurement 
purposes.  It will not be retroactive to losses incurred prior to 
that date.  People between the ages of 57 and mandatory retirement 
age (67 for men, 64 for women) with up to NIS 1.5 million (USD 380 
thousand) in pension savings will be covered.  The MOF chose that 
limit after calculating that it was the amount a person needed in a 
pension fund to be able to provide a  provide a monthly payout of 
about NIS 8000-the average monthly wage.  However, only NIS 750,000 
(USD 190 thousand) will be protected by the safety net, with the 
protected amount going down for those with smaller pension savings. 
The period of protection will be between 3 to 10 years, in 
accordance with the age of the pension saver.  If the person is 57 
today, the protection will be in effect for 10 years, until 
retirement.  If the saver is 64 to 67, the period of protection will 
be for 3 years.  There have been many different assessments of how 
much it will cost, ranging anywhere from little if the worst of the 
economic crisis has already passed up to as much as NIS 17 billion 
(about USD 3.9 billion).  Some economists  estimate that the cost of 
the benefits of the plan itself will be near zero, with the only 
costs involved resulting from the operation needed to administer it. 
 
 
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Why Should the Poor Subsidize the Rich? 
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¶11. In the 9 December issue of Ha'aretz, economic commentator 
Nechemia Strassler criticized the plan, saying that the hundreds of 
thousands of Israelis who do not have pension plans of their own 
will be financing the bailout of those who do.  He adds that setting 
up a "Safety Net Administration" will also be expensive and 
wasteful.  Strassler and numerous other commentators agree with the 
MOF view that the plan will be difficult to execute as it will 
require careful examination of eligibility and data on pension 
savings. Economists at the investment house Psagot-Ofek wrote in a 
December 9 report that the pension savings plan should never have 
seen the light of day.  They said that only in Israel was there a 
demand to supply a safety net for long-term savings, in spite of the 
fact that losses in Israel were lower than in many other countries. 
The reason for this is that people still remember that until a few 
years ago, pension insurance was fully financed or subsidized by the 
State, with pension holders invested primarily in special 
government-designated bonds. 
 
¶12. Others, such as several economists at Harel Insurance writing in 
their in-house publication, said that the plan is reasonable and 
good both from a macro and microeconomic perspective.  They praised 
its limited scope, saying that a more expansive plan with wide 
government guarantees would have encouraged riskier investing in the 
knowledge that the government would bail out those who lost money. 
The Harel economists also lauded the MOF's ability to stand up to 
the strong pressure to provide retroactive compensation for losses 
suffered previously.  They noted that this indicates that the MOF 
will not let the budget deficit be significantly increased. 
 
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Finance Minister: Revamp Pension Investing Completely 
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¶13. Finance Minister Bar-On, speaking at a conference on December 9, 
said that in the future the MOF would propose a comprehensive 
regulatory reform that would define pension and long-term savings 
investment tracks based on age, which would reduce the risk and 
volatility of investments as a person ages.  He said that it is 
important to take a long term view and to understand that the 
worldwide financial crisis obligates a deep global correction.  This 
holds true for Israel as well, where there is a need to revamp long 
term savings structures and regulations. 
 
 
CUNNINGHAM