At the end of successful talks before the weekend between a treasury team, headed by director general Ohad Marani and the U.S. Treasury, the U.S. team agreed to recommend to President George Bush the approval of loan guarantees to the Israeli government. Bush is expected to approve the first $3 billion in guarantees from a total of $9 billion.

The guarantees allow the Israeli government to raise financing on the international markets at lower interest rates, nearer to the level of U.S. Fed rates, but are conditional. Primarily the government must abide by its commitment to keep its budget deficit to within 2.5-3 percent of gross domestic product (GDP) next year and within 2.5 percent the year after.

The government was forgiven a similar commitment to meeting the 2003 budget deficit target of 3.5 percent GDP. The American team accepted the treasury's argument that while it could, and would, meet its spending target this year, it would be difficult to predict the drop in tax revenues, and hence the final size of budget deficit.

In addition, the U.S. team were keen to see the Israeli government forge ahead with privatization plans, and insisted that at least two of four state-controled companies - El Al, Bezeq, Oil Refineries and Bank Leumi - should be sold off by the end of next year.

Banks first

John Taylor, the U.S. treasury undersecretary for international affairs, says over concentration in the market is preventing efficiency in the banking sector, hence the government would be well advised to privatize Banks Leumi and Israel Discount promptly.

Taylor, addressing a meeting of members of the U.S. Israel Chambers of Commerce yesterday in Israel, argued that the sector could only become more efficient when these banks controlled by the government were sold off to the private sector.

"I expect a successful sell-off of Bank Leumi, Israel Discount Bank and Bezeq," he told the audience and added his support to the finance minister's claim that one of the highest government's priorities must be additional reforms in the financial sector.

Taylor believed that a growth rate of 5-6 percent of GDP a year was achievable for the Israeli economy. He welcomed reforms in the pensions sector too, saying the move of the pension funds away from guaranteed government bonds would improve liquidity in capital markets.