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Firms managing Israelis' pension savings are up in arms over the government's treatment of a major asset: bonds in Israel Electric Corporation. The accountant general, by announcing the government's intention to guarantee the IEC's upcoming bond issue, raised an interesting question: Does this mean the company's existing bonds don't enjoy state guarantees?

This is a weighty issue: The electric company is saddled with about NIS 60 billion in debt, mostly in bonds traded in Israel. It is challenged to issue more debt because of its already hefty liabilities; it has also borrowed so much from banks and other financial institutions that under the "single borrower" rules, it can't borrow any more from them. (The rules stop banks from lending more than a specific proportion of their resources to a single borrower. )

So the accountant general is basically saying that the main reason for guaranteeing the IEC's new bonds is to circumvent its limit as a "single borrower". Its bonds would be equivalent to Israel government bonds, which are not subject to such limits.

But the market says the real reason for the guarantee is deep worry over the IEC's enormous debt. State guarantees are meant to dispel such concerns; if a company collapses, the guarantees can be exercised and the loan collected directly from the government.

The government's willingness to stand behind the company paradoxically increased the angst among investors. Does this imply that the IEC's previous bonds don't enjoy the state's backing?

Institutional investors bought large quantities of IEC bonds assuming that they're covered by tacit government guarantees - no official backing, but a de facto assurance that the state won't let the electric company fold.

"If the [IEC bond] series I hold isn't officially guaranteed by the state, does this mean it doesn't have any state backing at all and that if the IEC's situation deteriorates I'll have to act immediately to redeem them early?" a senior official at a financial institution told TheMarker. Such concerns have escalated since the state let government-owned Agrexco go bust, refusing to repay its debts.

The Account General's Office, headed by Michal Abadi-Boiangiu, isn't perturbed by the implied threats from institutionals about putting IEC bonds up for immediate redemption. It doesn't intend to give them any leeway.

"Anyone who bought IEC bonds at 2.5% over the rate for Israeli government bonds should have realized that this isn't covered by state guarantees," a source at the office said. "You can't have it both ways: enjoying high interest and assuming state backing."

An official at the Accountant General's Office explained that IEC bonds are intentionally not covered by government guarantees. "It would be cheapest for the state to issue debt for all the government companies and allocate the proceeds to them through the budget, but why then did we establish government companies at all? We want market discipline, for the market to look at the company's condition rather than the state's condition," he said.

"We want the market to make it clear to the electric company that if it continues recruiting staff at high wages it won't be able to issue more debt. There should be a price paid for a government company's improper conduct, and only the market can reflect that price."

Officials at the Accountant General's Office also confirmed that the market-discipline policy makes government companies pay much higher interest than they would under the state's wings. But this damage is outweighed by the benefits of market discipline on the way these companies are run.

"State-guaranteed bonds aren't legally equivalent to bonds with no guarantee," an official insisted, but he wouldn't deny the existence of "tacit state guarantees" on bonds already in the market. "The IEC is obviously too big to fail, but in the hierarchy of creditors there would be a legal difference between bond series. The market takes this into account and it's reflected by the varying interest rates."