Israel Takes a Look at How It Will ‘get By’ Without U.S. Loan Guarantees

While Finance Minister Yitzhak Moda’i told a group of builders this week that Israel would “get by” without U.S. guarantees for the loans it needs to house new immigrants, the head of the country’s central bank hinted strongly that painful belt-tightening lies ahead.

Moda’i, addressing the Building Contractors Association on Thursday, said Israel’s economic troubles could be solved by economic growth and other measures, which he did not spell out.

Economists expect no unpopular fiscal measures before the Knesset elections June 23. But many believe such steps are inevitable given the costs of immigrant absorption, especially now that the U.S. loan guarantees appear doomed.

Jacob Frenkel, governor of the Bank of Israel, urged the government Wednesday to reassess its budgetary priorities for the current fiscal year in light of its failure to obtain guarantees for the $2 billion worth of loans it had planned on borrowing.

Israel can borrow that amount without U.S. underwriting, but not at the lower rate of interest it had counted on.

“We will have to ask ourselves whether we can afford today what we thought we could afford yesterday,” Frenkel told reporters. But as a nonpolitical official, he stopped short of urging a cutback in settlement-building in the West Bank and Gaza Strip.

A settlement freeze is Washington’s condition for receiving the loan guarantees.

Frenkel also intimated that a reduction of the government’s deficit would help Israel find the funds it needs in the world’s money markets.

But he warned against using the country’s foreign currency reserves for investment purposes.

Potential foreign lenders always examine the level of currency reserves before deciding whether to lend and on what terms, Frenkel said.