The $9 billion in US loan guarantees will be directed toward increasing growth and easing the public debt burden, not increasing the budget deficit, according to the detailed loan agreement between Israel and the US, signed last night.
The legal-financial agreement stipulates the terms for the loan guarantees the US administration will provide for bond issues by Israel on US financial markets in 2003-06.
Under the oral understandings, the loan guarantees would not be directed toward increasing the budget deficit, but to encourage growth, and refinance earlier high-interest loans with lower-interest loans. The Israeli government may be able to use the money to finance current activities.
The US administration made it clear that it expected the emergency economic plan submitted by Minister of Finance Benjamin Netanyahu to be implemented in full. In other words, Israel will significantly increase investment in infrastructures, privatize banks and government companies, and reduce the budget deficit and government debt.
The agreement stipulates that Israeli government investments beyond the Green Line will be deducted from the loan guarantees. The US and Israel agreed on a special reporting and deduction program.
The deductions article is the most confidential article in last night's agreement, due to its diplomatic repercussion on the implementation of the Road Map. The US reserves the right of flexibility and maneuvering room over actual deductions.
Under the previous loan guarantees in 1993-97, the US deducted $800-900 million from the guarantees - two-thirds of the Israeli government's spending beyond the Green Line. The US conceded a third of deduction, after it was shown that the money was used for the welfare of the Palestinians.
The dry legal language of the agreement's deductions article states that the US can deduct from the loan guarantees every shekel the Israeli government invests beyond the Green Line. Since the separation fence is situated beyond the Green Line, the US can, should it choose, deduct the cost of the fence from the loan guarantees.
Nevertheless, the US administration agreed to broad language, which gives it flexibility and maneuvering room in deciding how much to deduct.
In any event, the final decision on the deduction from the loan guarantees will be taken only in 2006. By then, it is assumed that the Israeli-Palestinian conflict will be resolved in line with President George W. Bush's Road Map. If the US does not adopt the same lenient policy as it did under the first loan guarantees, it could deduct more than $2 billion from the current loan guarantees.
Under the new agreement, the US decided on a number of significant financial relaxations in the structure of the issues. These will substantially lower the interest Israel will pay holders of overseas bonds.
The new financial structure of the issues will enable the Ministry of Finance to reduce its financing rounds on the local capital market, thereby reducing the long-term interest rates and mortgage interest rates, which will contribute toward lower short-term interest rates.
Following are the easier terms announced by the US government:
The US will allow Israel to spread the financing rounds backed by the loan guarantees over four years, instead of three, enabling Israel to hold the issues in accordance with international financial market conditions and the needs of the Israeli economy.
Israel will not be obliged to raise the full $3 billion in annual loan guarantees in a single issue in that calendar year. Israel can raise the money in several issues on the US financial market, in accordance with prevailing conditions.
Israel may use the unused loan guarantees from a given fiscal year to the following years. This means that Israel could use the loan guarantees for at least one fiscal year after 2005.
The US loan guarantees will be for issues redeemable in 20-30 years. In other words, although the interest will be paid regularly, the principal, which is much greater, will only be repaid in 20 or 30 years, in 2023-26 and in 2033-36.
This financial structure will simplify the issues procedures and make it easier for potential investors, especially large institutional investors, such as pension and mutual funds, to participate in the issues. The procedures will lower the cost of the margins and reduce the interest payments.
Deputy Accountant General Eldad Fresher announced that the Israeli government would raise the full $3 billion permitted this year in the last four months of 2003, subject to market conditions.
Published by Globes [online] - www.globes.co.il - on August 21, 2003