Israel Takes Bite Out Of Debt


Although by many measures the Israeli economy is humming along, it is still saddled with about $100 billion in long-term debt. This week, the government sought to take a bite out of it, The Jewish Week has learned.

It has mailed letters to 144,000 owners of Israel Bonds offering to redeem specific bonds early. It has also suspended the sale of bonds that mature in more than five years and sharply limited the sale of bonds that defer interest until maturity.

The move, according to Zvi Chalamish, Israel’s chief financial officer for the Western Hemisphere, is to further ensure “Israel’s economic strength for the future.”

“This is the right time to do it,” he said, noting that this was the first time the Ministry of Finance has adopted a debt-management program. About $9 million of Israel’s $30 million in foreign debt is from Israel Bonds, and the goal of the early redemption program is to retire $500 million of that by Feb. 29. All of the bonds eligible for early redemption pay interest upon maturity.

Calamish said the objective of the debt-management program is to improve the country’s credit rating to AAA in order to save $1 billion a year in interest charges. Standard & Poor’s Rating Service raised its long-term credit rating on Israel to A from A- on Nov. 27 — five notches below AAA — in anticipation that “government debt reduction would remain the key policy priority.”

But John Chambers, a deputy manager at the rating service, said one of the things affecting the rating is the fact that “Israel still exists in a dangerous neighborhood.”

“Risks shouldn’t be belittled, but in the past Israelis have shown they could stand up to those challenges,” he said. “It’s in everyone’s interest to try to come up with a solution that would enable Israel and all the states in the Middle East to live in peace and to integrate their economies.”

Kristin Lindow, the lead analyst for Israel at Moody’s Investor Service, said that despite its efforts, Israel’s “debt is high by international standards.”

Although it has improved — in 2003 the debt- to-GDP ratio was 102 percent — it is still high at 80 percent, according to Israel’s accountant general. “They plan to reduce it to 70 percent and 60 percent would make it seem more a normal country,” Lindow said. “There has to be a lot of credit given to the management [in Israel] in spite of everything else that is happening in the region.”

A better credit rating for the State of Israel would also mean lower interest rates for the private sector in Israel, Chalamish noted, and that would mean more foreign investment.

Asked the likelihood of bondholders redeeming their bonds early when they could get a higher rate of return by holding them until maturity, one analyst said he saw no problem because Jews buy the bonds for Zionist purposes and not investments.

Added Lindow: “When they bought the bond, that was the first mitzvah. If they are willing to redeem a higher paying bond for a lower one, that is a double mitzvah.”

Joshua Matza, president of Israel Bonds, said in a statement that his organization has been asked to sell $1 billion worth of bonds in 2008, the same amount it sold last year. He declined a request for an interview.