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A state increases its debt by selling government bonds. For years, government bonds, which are nothing more than a loan to the government, were the most stable, dullest thing imaginable. No investment portfolio could go without them as a solid platform for making riskier forays into the stock market.

Government bonds were considered rock-solid investments that delivered particularly meager returns, but were safe. The government would surely repay its debts to the people, right?

Not right. The government debt crisis began with minnows such as Iceland and Greece, and has spread to the big boys. Ireland, for two decades the poster boy of economic success, is on the brink of bankruptcy. Without emergency aid from the European Union - somewhere from 90 billion to 150 billion euros - Ireland will have to let its banks collapse, or default on paying government debt. It's that simple.

There's no telling how the Irish bailout will affect the markets. What's clear is that government bonds aren't as dull as dishwater anymore. In fact, they're an object of high risk and intense fascination. The deal "get a safe investment that will supply tiny returns" has morphed into "take tons of interest but don't count on getting your loan back."

Nobody likes that deal. Investors hate it; they can't base pension savings on risky assets. But if even governments can't be counted on anymore, there's no safety anywhere.

Governments also hate it because they need to rely on the capital markets for loans. They use the proceeds to finance their budgets. The moment the markets lose confidence, the governments lose their source of financing.

It's a recipe for sovereign bankruptcy and utter disaster.

Danger looming large

The global economic crisis is now reaching its most dangerous stage, when states tremble on the brink of bankruptcy. This is the worst danger there is because a state is the safety net for companies and the people. States can save people who go bankrupt, through welfare, unemployment and make-work schemes. States can choose to save banks through nationalization or guaranteeing their deposits.

But if the state itself collapses, nobody can save anybody. It's the road to a 1930s-style Great Depression.

Has the crisis reached the stage of states defaulting? Will global government bond markets collapse, leaving states unable to finance themselves?

It's anybody's guess and Israel, which has a large government debt, should be very worried.

But Israel can thank three factors that strengthen it, relatively speaking, in that horror scenario. One is the government debt-management unit over at the Finance Ministry, which is doing stellar work.

The other is that we have contended with the crisis without building up gargantuan government deficits, and with our banks intact.

These are points that will help Israel if and when the crisis worsens to the point of major countries going bankrupt. But our greatest strength is Stanley Fischer.

Yes, the governor of the Bank of Israel is Israel's best insurance policy, because he built up foreign currency reserves amounting to $70 billion for us.

Fischer didn't mean to accrue $70 billion. He was just protecting the shekel-dollar exchange rate. He didn't mean to build up an emergency cash reserve to shield us from planet-shaking implosions. He just wanted Israel to have enough cash in the event of war or an attack on the shekel.

But the upshot is that Israel today is sitting on $70 billion in cash, more or less half the help Ireland is seeking. That's a lot of money. When the crunch comes, it could save the Israeli people.