Taking Stock / When Condi Called Bibi

An old chestnut tells of the billionaire who was asked how he made his money. He drones out this monologue of how he began as a shoe salesman, then opened a store that turned into a chain and expanded into new areas. He built his business penny by penny, brick by brick, he relates ad nauseum. Finally, when he was 40, he finishes, "My uncle the oil tycoon died and left me his billions."

That joke comes to mind when Finance Minister Benjamin Netanyahu, and a few businessmen and analysts, wax loquacious about the economy's turnaround. They tell us that transfer payments have been slashed, about budget cuts, about pension reform, about privatization, about the monopolies facing competition, and so on and so forth - steps, decisions, resolutions, efficiency measures. Sometimes they mention those loan guarantee thingies as an aside, and sometimes they skip the whole subject; after all it's just a marginal matter of a lousy $9 billion.

It would be a huge mistake for the finance minister, tycoons and analysts to ignore the critical impact of the guarantees. If we succumb to believing our own bluffs, we may wake up one morning and discover that reality is cruel after all. Here are a few points for thought.

The U.S. loan guarantees are a long-term, low-cost credit line. Even though they are just "guarantees," they lead to a direct infusion of tremendous sums of foreign currency into Israel. The guarantees cover 30-year loans at relatively low interest rates, so the extra burden of debt will be felt only in the long run.

The guarantees are the only reason for the following phenomenon: Even though the government is running a record deficit of NIS 30 billion this year, the treasury raised only NIS 19 billion in the local marketplace. That's because it raised the rest abroad, thanks to the guarantees.

Even more eye-popping: Next year's deficit also is expected to be gargantuan, at NIS 25 billion. But the treasury is planning to tap the local market for only NIS 10 billion - the rest will come from overseas, backed by the guarantees.

The dramatic decline in domestic fundraising has changed the entire marketplace, allowed long-term interest rates to drop sharply, and revived the primary market. Coupled with the American intervention in Iraq, the guarantees have steeply reduced Israel's risk premium.

Right after Washington announced its acquiescence to the loan guarantees, the Israeli government raised $750 million in the United States, selling bonds that were not backed by the guarantees. Netanyahu called it a terrific coup, saying Israel had not managed to raise a sou in New York for three years beforehand. "We did our bit, now the Bank of Israel has to lower interest rates," the finance minister proclaimed.

Indubitably true, but that's only a small part of the story. The reason the markets welcome Israel again is because of America's 30-year, $9 billion credit line. Foreign investors are willing to buy Israeli bonds mainly because they know we can easily repay the loans we take on the open market, thanks to the guarantees.

One of the main reasons the stock market shot up and the economy stopped crumbling is the relatively rapid interest rate cuts by the Bank of Israel. That couldn't have happened unless the financial markets stabilized. Yet one has to wonder if they'd have stabilized that fast if not for the American billions.

The finance minister's circles are perfectly well aware of the guarantees' role. So their latest spin is: Sure, the guarantees are important, but we only got them because of the economic steps we've been taking since 2003 began.

Sounds good, but the dates don't work out, nor do the reports from Washington. The Israelis began negotiating for the guarantees more than a year ago, under the previous Sharon government and long before the change in leadership at the treasury.

The Americans official reply about the guarantees request was delivered on March 20, 2003, less than a month after Netanyahu took over as finance minister. National Security Advisor Condoleezza Rice called him in the dead of the night, and the next day the treasury announced that Netanyahu had thanked her in his name and in the name of the people of Israel.

The White House acquiesced after being hit with letters from both sides of Congress' aisle, begging for succor to Israel and pledging their support. The leader of the Republican majority in the Senate, Bill Frist of Tennessee, and Democratic minority leader Tom Daschle of South Dakota wrote to urge Bush, saying Israel was confronting skyrocketing defense expenditures and economic challenges. The United States had to help, they and others pleaded.

The Americans could not allow Israel to lose its military edge because of its economic woes, Daschle and Frist wrote.

In other words, Israel got its $9 billion in guarantees for political and security reasons, after the United States diagnosed its economy as sick. We didn't get the money because America had faith in the Israeli economy.

Maybe the timing of Rice's call to Netanyahu best explains the nature of their motives. She called a few hours after the United States had attacked Iraq. It is interesting that she found the issue important enough to phone Israel at such a dramatic time.

We can welcome the upturn in the capital market and the risk premium drop, and hope Israel's status in the international marketplace will help us overcome our economic travails. But we must not forget the key role played by that $9 billion check cut in our name, at the expense of the American taxpayer, and by what right and in what context we received it.