Treasury Fighting BOI Over 'Loan'

Behind closed doors there is a billion shekel battle waging between the treasury and the Bank of Israel.

Behind closed doors there is a billion shekel battle waging between the treasury and the Bank of Israel. The dispute is over an affair that began in the 1980s. At that time, part of the treasury's activity was financed by money printed for it by the Bank of Israel, and the bank reported the printing as a loan to the government.

Over the years, the central bank has transferred part of its earnings to the government, to offset part of the loan. But in 2002 something happened. The bank began chalking up losses, and began offsetting the treasury's old debt with treasury deposits held by the bank.

The treasury was up in arms. Accountant general Nir Gilad demanded that the bank write off the balance of the loan, arguing that it derived from an old fiscal policy, not a 'real' loan, an accounting 'fiction.'

In 2003, then finance minister Benjamin Netanyahu pressed central bank governor David Klein to seek an opinion from the attorney general, whom they approached together, and Davida Lachman-Messer was appointed to look into the matter. She found that the treasury was correct, and that the loan should be written off.

But then Stanley Fischer took up his post, and said that he was unwilling to write off the loan because it would mean printing money, and he was unwilling to back such a blatant breach of the Bank of Israel's independence.

The accountant general at the time, Yaron Zelekha, on the other hand, argued that the bank would be placing an unnecessary burden on the bond market, since the treasury would be forced to raise more money because of the central bank's offsets. But the bank continued to offset large sums from the treasury's deposits, and the dispute continued on - until it reached a climax about a month ago.

In December 2008, Fischer offset another NIS 860 million from the treasury's deposits, and this time, with the dismal state of the budget, the move was met with fury from the treasury.

"The timing is insane. Even if there is a debt, is this the time to call it? At a time when we are scraping money out of every possible source to support the economy," a treasury source complained.

Accountant General Shuki Oren has recently approached the attorney general again, in writing, and Menachem Mazuz replied, in writing, that the office has already opined on the matter. referring to Lachman-Messer's findings, and does not understand why the debt has not been written off.

A senior source in the treasury said it is "an unprecedented scandal" that "Fischer is behaving like the neighborhood bully" by seizing money that doesn't belong to him, since the central bank undertook to conform with the ruling by the attorney general - but has failed to do so.

And to this, the central bank responds, "the comment is unworthy of response."

The treasury's fury is also a result of the huge deficit it will have this year. Once the bank 'offsets' NIS 860 million, it will be forced to raise this amount, in addition to the NIS 35 billion it is already being forced to raise, an additional burden on Israel's internal and external debt.

Accountant General Oren, who is handling the matter on behalf of the treasury, has refused to comment - he would only say that such public confrontations with the Bank of Israel are not right, and harm the economy.

But the battle continues to wage. The anger on both sides is seething. Each sees the issue as a matter if principle, and the bad blood between the two state organizations is only getting worse.