Under Political Pressure, Treasury Looks for Cheap Rescue Plan to Calm Markets

The announcement of a new emergency economic plan to rescue the Israeli public's retirement savings largely depends on developments in U.S. and Israeli capital markets, and in particular on media pressure on the Finance Ministry and politicans in this pre-election period, said senior officials at the treasury and the Bank of Israel over the weekend.

Treasury and central bank officials have spent the past few days discussing possibilities. Finance Minister Roni Bar-On and central bank governor Stanley Fischer are yet to agree on a plan. If they do come to a decision, a plan could be presented to the public at the end of this week at the earliest.

Various parties, including Israel Securities Authority Chairman Zohar Goshen, continued discussing the emergency rescue plan at the Finance Ministry on Friday. The big losses in the U.S. and Israeli stock markets last Wednesday and Thursday put a huge amount of pressure on treasury officials, who were further influenced by media headlines calling for a new emergency plan.

The focus was on a safety net to save the provident and pension funds, which are the public's retirement savings. The TA-25 index fell 7.8% last week. However, on Friday, Wall Street recovered strongly after it was revealed that U.S. President-elect Barack Obama would nominate Timothy Geithner, the president of the Federal Reserve Bank of New York, as secretary of the Treasury.

The big gains in New York, especially if followed today by gains in Tel Aviv, will reduce the pressure on treasury officials and politicians, and allow them to make decisions in a calmer atmosphere.

Meanwhile, discussions continued yesterday and will pick up speed this week.

Around the end of last week, treasury officials realized they needed to drastically change their thinking. Senior officials who had opposed any treasury initiatives - both because of the high cost and because they wanted to give the market forces time to work - changed their minds quickly.

Now, everyone involved believes the Finance Ministry must go public with a plan - and the ministry is now figuring out how to do so.

Fischer, who has expressed serious doubts about providing such a safety net for pension savings, changed his view last week following the big losses in U.S. markets, Israeli markets and around the world. Fischer started to speak in favor of steps to calm Israeli markets and prevent the public from panicking.

At the Bank of Israel, the talk was that psychology creates reality and the biggest danger facing the Israeli economy is public panic. Fischer will spend the week in Israel in order to participate in any significant decisions and to be available to discuss the plan.

The treasury is seeking for the cheapest possible rescue plan that will still provide an acceptable solution - and calm the markets. In any case, the solution will not cover all the problems.

The treasury's basic assumption is that any solution will cost many billions. The Bank of Israel believes the biggest danger is choosing the wrong solution, which would cost billions and mortgage Israel's future, while worsening the economic crisis. And then, fear the officials, the next step will be a national commission of inquiry to find out who brought the country to bankruptcy.

In internal treasury discussions, the issue of the well-off keeps on coming up. Even if a decision is made to prop up provident funds, the treasury wants to restrict the move so that the wealthy do not profit the most.

Treasury officials said over the weekend that politicians are pressuring them to find a solution for the capital markets - politicians including Prime Minister Ehud Olmert, Foreign Minister Tzipi Livni, Defense Minister Ehud Barak and Knesset Finance Committee Chairman Avishay Braverman - on the eve of the elections and the primaries. Such influence could lead to a more expensive and less effective solution.

Bar-On's imbroglio in a double-voting affair in the Knesset also worries senior treasury officials, as they fear it could harm his ability to fight off political pressure and restrict their freedom to present a proper plan.

Accountant General Yehoshua Oren told Channel 10 on Friday that the combination of the economic crisis and the elections could be devastating, and Israel might find this the most expensive election campaign ever.

Oren rejected the option of the state guaranteeing the public's pensions, saying that until the crisis began, the funds showed impressive profits.

However, a solution might prevent damage to specific age groups, such as those over 60 who are nearing retirement. In principle, the treasury expects the funds to recover over the long term and younger citizens' retirement savings should recover, they say.