Israel Bonds Celebrates 50 During Economic Revolution

There are few other Jewish organizations that can reflect on 50 years and boast of having raised more than $22 billion.

But as Israel Bonds celebrates its 50th anniversary amid the dramatic transformation of the nation’s economy, it may discover that its critical role is gradually declining.

Israel’s official position, as voiced by Prime Minister Ehud Barak and Finance Minister Avraham Shochat, is that the organization still makes vital contributions to the economy. The Finance Ministry still factors in Israel Bonds financing as a significant component of international capital-raising needs, totaling between $2 billion and $2.5 billion a year.

However, Avi Ben-Bassat, director general of Israel’s Finance Ministry, said the rapidly changing economic landscape will likely reduce the role of Israel Bonds in the Jewish state’s future. Private industry, which relies on money raised from individual investors rather than government bonds, is fueling Israel’s economy.

“We think Israel Bonds is a tool that should still be preserved, Ben-Bassat said. “But if we would lose this source, I do not think the State of Israel would have any problem raising the sums on the open markets.”

Such comments contrast with the message Israel Bonds is disseminating during its jubilee year.

Gideon Patt, president and chief executive of Israel Bonds, said that the improvements in Israel’s economy do not render the bond-raising drive obsolete. Even in the new, high-tech environment, he said, Israel has enormous spending needs in education, immigrant absorption and infrastructure.

“If Israel wants to maintain the standard of living and its security needs it must double its economic capacity in the coming 10 to 12 years,” Patt said. “The bond money is the only money for Israel that has no strings attached. Banks are very attuned to political changes, but the bond is never attuned to political changes. On the contrary, when the situation is bad in Israel the sale of bonds goes up.”

Israeli financial officials agree that this is the main advantage of Israel Bonds.

“The organization has proved itself,” said Arnon Ikan, director of foreign currency transactions at the Finance Ministry. “Especially under adverse circumstances, it has particular importance.”

Nobody denies the importance of the massive sums of money Israel Bonds has raised over the past 50 years, which Patt said provided 50 percent of Israel’s development budget. Funding, he added, was always conditioned on earmarking the money for civilian economic infrastructure projects such as roads, water transport, ports, airports and infrastructure for new communities.

However, Finance Ministry officials say Israel Bonds money is not an example of “designated giving.”

The funds are actually funneled into Israel’s general budget. Much of the funds today ironically find their way back to the United States — to repay outstanding debts to previous bondholders.

Market experts agree that the bonds have been important during times of crisis. Yet as Israel continues on its path toward peace, this may become less critical.

“In the new environment which Israel finds itself, with high credit ratings, strong levels of direct foreign investment and the high-tech revolution, we will probably find Israel Bonds are going to become passe over the next few years,” said Neil Corney, head of foreign exchange trading at Bank Hapoalim, Israel’s largest bank.

Corney added that Israel is likely to find itself increasingly able to raise capital on international markets at more attractive rates than Israel Bonds can offer.

Since 1995, the Israeli government has secured a foothold on international markets in order to create alternative stable financing frameworks following the end of a $10 billion U.S. loan-guarantee program in 1998.

As international credit agencies lifted their ratings of Israel, the government took advantage of the opportunity to launch major bond offerings on the Yankee (U.S.) market, Eurobond market and even the Samurai (Japanese) market. In 1999 alone, Israel raised $600 million in debt offerings on international capital markets, while Israel Bonds raised $900 million.

Meanwhile, the high-tech revolution has also created new avenues of investment for Jews who prefer to support Israel through noncharitable means.

With 100 Israeli companies listed on the New York-based and technology-heavy Nasdaq stock exchange, investors can directly support Israeli companies and, under good market conditions, generate much better returns than bonds.

Patt does not think this will create a new obstacle to selling Israel Bonds, since bond investments are always safer than stocks.

“People who have a portfolio and want to sleep well at night without being totally dependent on Nasdaq and the crazy figures on television want a portion of their portfolio in bonds which is a steady source of income,” he said.

To help ensure its future, Israel Bonds must also continue to reduce the costs of running the organization. Patt has indeed brought the budget down 15 percent to $39 million, as the Finance Ministry requested.

Beyond economic and business trends that could challenge the future of the organization, Israel Bonds advocates say the group has another raison d’etre.

Since it targets individual Jewish investors — it sold to 100,000 people last year — the bonds help foster a strong economic bond between Jews in Israel and the Diaspora.

Israel Bonds currently raises less than 30 percent of its funds from institutional sources, a figure that has decreased since the early 1990s, according to a senior bonds official.

Yet in the long term, this advantage alone may prove a difficult means of defense against economic fundamentals.

“The Finance Ministry does not want to turn to the American Jewish population and say, `We don’t need you now,'” said Corney, the Bank Hapoalim trader. “But Israel Bonds will probably have to work much harder in the future — and it may have to be phased out over the years.”