Securities Auth. Proposing 'Distress Funds'

The Israel Securities Authority is to initiate distress funds, whose purpose will be to invest in corporate bonds, thereby injecting liquidity into the capital market.

The funds are to be owned by the government and private entities. The ISA has also proposed (although no agreement has been reached) that the state provide guarantees to banks in order to increase the supply of corporate credit.

Meanwhile, at internal discussions within the treasury, the cost of the safety net for provident fund members is being estimated at about NIS 10 billion, spread over a number of years. The final amount will be determined after the treasury decides which of the models are to be implemented.

Lengthy discussions, some of them led by Finance Minister Roni Bar-On, were held yesterday with the aim of reaching a final decision on the plan, with the participation of all the heads of the ministry and their assisting teams.

Top-ranking ministry officials say that the talks are near completion. The plan, they say, will be a limited one, and will focus on providing a safety net for pension savings for persons over the age of 60, who have incomes of less than double the minimum wage, NIS 7,700 a month.

The safety net will be in effect as of the date of its approval by the Knesset, not retroactively to the beginning of the capital market crisis. Pension savings will be linked to the Consumer Price Index, with a relatively low interest rate that will not exceed 3-4%.

In practice, the plan will compensate only a few tens of thousands of provident fund members, and will benefit almost no pension fund members, because the vast majority of savers who are 60 years or more old belong to the old pension funds, which have been unaffected by the events of the past few months, since they are invested in designated government bonds.

Economists involved in the discussions currently under way in Jerusalem estimated yesterday that the safety net planned by the treasury will expose the state to a loss of NIS 9 billion for every 10% fall of the markets.

A ministry spokesman declined to comment on assessments.

At the same time, Attorney General Menachem Mazuz ruled that the bailout plan for the capital market being drawn up by the treasury is not to be considered "election economics" - thereby giving a green light to spread the safety net.

Sources in the treasury noted yesterday that Prime Minister Ehud Olmert has asked to see the ministry's recommendation before it is made public, although he rejected the option of the proposal being forwarded to him in Washington, where he is visiting at the moment.

In a phone conversation between Bar-On and Olmert yesterday, the two agreed that only after the premier's return to Israel would he see the recommendations and discuss them with the heads of the Bank of Israel and the treasury.

Netanyahu's plan

In a meeting with Olmert last Thursday, Likud chairman Benjamin Netanyahu presented his own plan. According to its terms, the state would provide a "safety net" of NIS 20 billion to institutional investors, for purchase of corporate bonds. The guarantees, with a lifetime of 10 years, would assured annual adjusted yields of 3-4% on corporate-bond investments.

The plan does not address provident fund members or tycoons, but corporate bonds. Nevertheless, strengthening of corporate bonds will improve the position of pension savers and tycoons alike.

According to Netanyahu's consultants, in the best case scenario, if the value of the bonds exceeds the "safety net," the plan would cost the government nothing. In the worst case, the plan could cost the government a few tens of billions of shekels over a period of 10 years - a burden that the treasury can handle.