Treasury Reduced National Debt by Swapping Dollars for Euros

Israel issued NIS 1.5 billion worth of bonds denominated in euros in order to diversify Israel's debt, most of which is in dollars.

The Government Debt Management division at the Finance Ministry swapped hundreds of millions of dollars of debt for euros over the last year, TheMarker has learned. And given the euro's depreciation over the course of that year, the effect was to substantially reduce the government's debt.

Shuki Oren, the ministry's accountant general, confirmed in a conversation with TheMarker yesterday that the swaps had taken place.

He added that Israel recently issued NIS 1.5 billion worth of bonds denominated in euros. The purpose of the offering was to diversify Israel's debt, most of which is in dollars. But given the erosion of the euro since the offering, which took place in early March, the move proved particularly opportune.

In Oren's view, the euro's sharp appreciation on Monday, following approval of an aid package for Greece and other euro-zone nations, and the day's surge in share prices are both self-explanatory. But why the euro and share prices then slipped on Tuesday is less clear, he said.

"Possibly the euphoria of [Monday] was followed by sobriety," he suggested. People may have realized that the solution was a financial one, not an economic one, so it gave Greece breathing room, but nothing more.

Whatever the reason, Oren said he sees no point in keeping too close an eye on the forex market and jumping to conclusions on a daily basis.

Europe's economic growth is stuttering and many of its governments are running deficits, and loans are not a solution, he added. The real solution must come through economic growth, and the path to economic recovery remains obscure.

Cutting government spending, which is one obvious solution, is problematic, Oren noted: Tax hikes are a problem because people don't like them, but they don't appreciate spending cuts, either.

Despite the reassurances offered by Bank of Israel Governor Stanley Fischer earlier this week, Oren believes the crisis in Europe will impact Israel, in two ways. It will weaken demand for Israeli products, and the weak euro will hurt Israeli exporters.

His solution is for Israeli exporters to develop new markets. Thus the finance minister's present visit to China is very important, for learning ways to increase exports to growth areas, Oren said.

One person unsurprised by the euro's pullback on Tuesday was Danny Tsiddon, head of the Capital Markets Division at Bank Leumi. He argues that the euro's appreciation on Monday was excessive, so the ensuing correction was right and proper.

Tsiddon believes that the euro's depreciation is good for Europe, and that in fact, the continent's economic leaders had aimed to bring it about, though in a gradual, controlled process. Their target is to reduce the euro to 1.10-1.20 euros per dollar, the professor thinks. A weak euro would render the euro-bloc economies more competitive and help restore economic growth - which in turn would help them pare down their debt over the next several years.

"We Israelis shouldn't fume and weep over the weak euro," Tsiddon said in a conversation with TheMarker. "We should prepare for a new euro, in both the short and long run. In the short run, we need to know how to defend ourselves against a weak euro. And in the long run, exports to Europe may not pay, so we need to seek other markets - the U.S., the Far East and others. The recession in Europe will be long and painful."

It will, however, pay to import from Europe, Tsiddon added.