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WASHINGTON - Israel stopped raising money in the United States in the first eight months of the year following indications that if executed, it would have been required to pay a rate of interest that represents a downgraded credit rating for the country.

Israel was able to avoid raising money overseas this year due to the structure of its external debt, which is not rising and is primarily long term. Money raised via the Israel Bonds also played an important role in helping finance the country's external debt since the beginning of the year.

Next week, a senior Finance Ministry team headed by treasury director-general Ohad Marani will hold a series of meetings in New York with the heads of Lehman Brothers and Salmon Smith Barney regarding the possibility of issuing $200-400 million in bonds to service Israel's external debt.

Accountant General Nir Gilad will be faced with two contradictory considerations. On the one hand, the key lending rate of the United States Federal Reserve is very low at 1.75 percent, and therefore, the base rate for interest rates is low. As a result, the U.S. government is currently raising long term funds at 4.7 percent, which is the base for all calculations.

At the begining of 2002, Israel could have raised bonds at 6.4 percent - 170 points over the U.S. base level of 4.7 percent, which is considered a reasonable price. However, due to the security and economic events in Israel, the cost of rasing money has gone up, and Israel is now being asked for 250 points above the base level, namely 7.2 percent.

While that is not a high interest rate on an absolute level, Israel does not want pay a premium of 250 points, since according to standard practice, for a country like Israel - with an A minus credit rating - the premium goes to up to 200 points above the base rate. If Israel has to pay 250 points above the base rate, then de facto the country has a rating of BBB minus, not a good message to be sending out to the capital markets. Therefore, Israel has refrained from taking credit at such a high premium.

Nir Gilad and his team will be looking to see whether things have changed for the better and that the premium Israel will be asked to pay has dropped to more reasonable levels of up to 200 points. If not, it will continue to avoid raising money in the U.S.

Israel is out of the IMF loop

When asked about Israel's place at the International Monetary Fund's annual convention, which starts today, all I can do is smile and say it has no place at all: Israel is not participating in any of the IMF discussions.

At one time, former Bank of Israel governor Jacob Frenkel would take part in a panel or two so Israel's name would be mentioned. But today we don't even have that.

At least there is one positive aspect to the whole thing: Israel does not need the IMF or the World Bank's money. That does not mean Israel is completely independent. But when Israel did need assistance - as was the case in 1985 with the stabilization program and later during the mass wave of immigration from the former Soviet Union - the United States came to Israel's aid: one time with special grants and one time with loan guarantees, which are like money in the bank.

Today, for example, there will be a special seminar of the Middle East and North Africa. Israel is not mentioned, was not invited and will not be participating.

The numerous speakers from throughout the region will talk about creating a safer atmosphere for investment and trade, but no Israeli representative will be there to contribute to the discussion. There were other times, after the Oslo Accords, when Israel was a welcome guest at the convention. Finance ministers from around the world, including from Arab nations, would wait in line to meet their Israeli counterpart. We were persona grata and everybody would talk with the Israeli delegation and the Israeli media about plans for the new Middle East and not about PA Chairman Yasser Arafat and the Muqata.

This time around, Israel is not so welcome, and its delegation will be smaller than in recent years. Finance Minister Silvan Shalom will arrive in Washington Saturday night and will give a short speech the next day along with all of the other sovereign representatives. Bank of Israel Governor David Klein, along with two senior central bank officials, has been in Washington since Wednesday.

The conference itself is not particularly important for Shalom. His main target is to prevent Israel's credit rating from being downgraded. As a result, he, together with Accountant General Nir Gilad and treasury Director-General Ohad Marani, will meet in Washington and New York with representatives of the credit ratings agencies to persuade them not to downgrade Israel's rating.

However, the fact is that de facto Israel's credit rating has been downgraded since the market is already asking Israel for a 2.5 percent premium above the price paid by the United States government to raise money.

So why is it so important to prevent a formal downgrading of Israel's rating. Because as soon as that happens, Israel will have to pay even more to raise money, and it will then be very difficult to turn the wheel back.