VZCZCXRO6671
RR RUEHROV
DE RUEHTV #0485/01 0611219
ZNR UUUUU ZZH
R 021219Z MAR 09
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 0763
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 TEL AVIV 000485 
 
SIPDIS 
 
NEA/IPA FOR GOLDBERGER, SACHAR; EEB/IFD FOR JACOBY; TREASURY FOR 
BALIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV IS
SUBJECT: GOI PLANS FOR DEALING WITH FINANCIAL CRISIS 
 
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Summary 
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¶1.  Yadin Entebbe, the head of the Capital Markets Division at the 
Ministry of Finance (MOF) says that Israel has not yet borne the 
full brunt of the worldwide economic crisis.  The GOI has come out 
with a three-pronged plan to deal with the crisis -- providing loan 
guarantees to banks to make capital available more cheaply, 
participating in special investment funds to support the capital 
markets, and changing budget priorities to emphasize job-creation. 
Entebbe says that the firm principle guiding GOI actions is to keep 
investment decisions in the hands of professionals and out of 
government hands.  He also noted the new "marked-to-market" rule 
which would help money managers avoid having to report the full 
extent of their short-term losses on poorly performing bond 
investments.  Regarding the GOI's pension safety net plan, Entebbe 
said that it was neither necessary nor harmful. End Summary. 
 
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Israel Not Yet Seeing the Worst 
------------------------------- 
 
¶2.  Entebbe told Deputy EconCouns at a recent meeting that the 
worldwide financial crisis has not yet really hit Israel's real 
economy in a big way, despite recent reports of rising unemployment. 
He said that while there have been pessimistic projections and some 
layoffs, the crunch -- business closings and massive layoffs -- is 
yet to come.  Everything depends on how well Israel's major trading 
partners, the U.S. and the EU, weather the storm. Entebbe thinks 
that governments worldwide have been making the right decisions and 
that the extremely negative psychological atmosphere that pervaded 
the markets in October and November of last year had improved 
somewhat. In addition, the amount of money that Israelis were 
pulling out of their long-term investment plans on a daily basis had 
returned to pre-crisis levels.  However, he did not think that this 
would result in a true amelioration of the serious financial crisis. 
 He said governments will still have to struggle to convince 
financial institutions to resume normal business activities. 
 
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GOI Has Three-Pronged Program 
----------------------------- 
 
¶3.  Entebbe stated that the GOI and MOF's handling of the crisis has 
been criticized on two fronts--that they were not doing enough and 
that they were reacting too slowly.  While outlining the three basic 
steps the GOI/MOF has taken to deal with the crisis, he pointed out 
that no matter what a government does during an ongoing crisis of 
this magnitude, it will never be enough to satisfy critics.  The MOF 
designed a program to help the banking sector raise capital via 
government loan guarantees.  To help the capital markets, special 
investment funds are also being set up.  In addition, there will be 
a need to change the priorities in the 2009 budget (after a new 
government takes office) to enable additional investment in 
infrastructure and other job-creating activities. 
 
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Loan Guarantees for Banks 
-------------------------- 
 
¶4.  Entebbe said that Israeli banks cannot raise money in the market 
at reasonable rates.  The MOF is offering the banks loan guarantees 
that will make it cheaper for them to raise capital.  The program is 
designed to help them raise more money, not to force them to lend. 
Lending will only pick up when banks gain the confidence to reenter 
the markets.  The mechanism for raising capital involves having the 
banks sell a financial instrument referred to as a "postponed bond." 
 The government will guarantee the payments on the bond to the 
investor, substantially reducing risk. 
 
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Unfreezing the Bond Market 
--------------------------- 
 
¶5.  Similarly, the corporate bond market is also frozen, with no new 
bond issuances coming on the market.  Israel Discount Bank pulled a 
bond offering in January when the best rate it could get was about 
nine percent.  To deal with the problem, the MOF has come up with a 
complex scheme to encourage investment. It is holding an "auction" 
for private investment managers bidding on the right to put together 
a syndicate to invest in new bond offerings.  The government would 
then put up a certain percentage of the funds pledged by the 
syndicate.  In return for the investment, the syndicate will receive 
an annual management fee of 0.8 percent and a "large success fee" 
after a number of years if annual returns continually exceed eight 
percent.  The group which offers to put up the most money for each 
government shekel invested will win the auction and receive the 
 
TEL AVIV 00000485  002 OF 002 
 
 
government matching funds to manage.  Entebbe expects that the 
government will end up putting up about NIS five billion to match 
the NIS 15 billion that will ultimately be raised and invested by 
the syndicates, a ratio of one to three in government versus private 
investment. 
 
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Keep Investment Decisions Professional 
-------------------------------------- 
 
¶6.  The plan is for this investment fund, open only to Israelis due 
to the government guarantee, to put at least NIS 20 billion into the 
bond market in 2009, and more later, if necessary.  The MOF is 
determined to keep the government out of the investment 
decision-making process, and make sure that decisions about which 
bonds to buy will be left entirely to the professional money 
managers who will be handling the funds.  Entebbe noted the irony of 
the government of a "supposedly socialist Israel" keeping a 
hands-off attitude towards investment decisions made with its money, 
while the government of the "capitalist U.S." is deeply involved in 
the decisions regarding how to deploy the bailout money made 
available to strengthen the economy. 
 
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New Mark-to-Market Rule 
------------------------ 
 
¶7.  Entebbe also commented on another measure the MOF took to ease 
the burden caused by the sharp bond market decline on money 
managers.  He said that bond values are usually "marked to market" 
-- that is valued at the last traded price -- for reporting 
purposes.  Money managers would now be allowed to value up to three 
percent of their bond holdings at their purchase prices instead. 
This would allow them to avoid reporting losses on selected bonds 
that have declined in value since they were purchased, on the 
assumption that most will not default but would ultimately pay off 
at full value when they come due.  This small change is expected to 
make it a bit easier for money managers to be able to report 
somewhat more positive results to investors. 
 
--------------------------------------------- - 
Pension Safety Net Unnecessary but not Harmful 
--------------------------------------------- - 
 
¶8.  Regarding the government's plan to provide a safety net for 
pensions, Entebbe said that the program protects only a limited 
number of people and would likely not end up costing a lot of money. 
 He said that Israel was one of the few countries in the world to 
focus on this issue, as most others were dealing with bigger issues 
such as the fundamental health of their banking and financial 
systems.  Since the losses in Israeli pension and other retirement 
plans were at the low end of the average losses for most 
industrialized countries, he maintained that the program was 
superfluous.  However, given that the public -- inflamed by 
newspaper pundits -- demanded it, he did not see it as particularly 
harmful. 
 
 
CUNNINGHAM