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Israel plans to hold its first issue of bonds backed by American loan guarantees in July 2003, TheMarker has learned from sources near the subject.

Altogether Israel is entitled to raise up to $9 billion in American-backed debt, at a pace of $3 billion a year. The sum involved is substantial, and allows the government to reduce its fund-raising efforts on the domestic market by tens of percent a month.

The price of the bonds will range from 40 to 60 basis points above ordinary American T-bills of the same period to maturation.

American government bonds today trade at yields of 3.9%. The yield on the Israeli government bonds should therefore range from 4.3% to 4.5%.

The U.S. has already agreed that Israel issue debt backed by the federal government, but the language of the guarantees has yet to be finalized. The issue at stake is strings the Americans mean to attach, such as an Israeli pledge not to use the proceeds of U.S.-backed bonds for investment in settlements.

The Americans also want Israeli assurances regarding the extent of the government's budget deficit, but the ceiling on the deficit, and how the deficit will be calculated, have yet to be stipulated.

Last week an Israeli treasury team headed by director-general Ohad Marani and deputy accountant-general Elded Frecher flew to Washington for talks with the American team, led by Gary Edson, deputy to National Security Adviser Condoleezza Rice.

Once the strings have been spelled out, the Israeli and American teams can discuss the technical issue of the fundraising on the American capital market. Meanwhile, the Israelis are in talks with potential underwriters. The Finance Ministry says that the lead underwriter has not been chosen yet.

Because of the rock-bottom bond yields on the American market, the timing of the guarantees could not be better, from Israel's perspective. The Israeli government stands to save some NIS 900 million compared with the alternative – raising capital through "regular" bonds.