US embassy cable - 05TELAVIV4880

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 004880 
 
SIPDIS 
 
E.O. 12958: DECL: 08/08/2015 
TAGS: ECON, EFIN, PGOV, PREL, ELAB, EAIR, IS, GOI INTERNAL, ECONOMY AND FINANCE, GAZA DISENGAGEMENT 
SUBJECT: FINANCE MINISTER NETANYAHU RESIGNS: ECONOMIC 
IMPLICATIONS 
 
 
Classified By: Deputy Chief of Mission Gene A. Cretz for Reasons 1.4 (b 
) and (d) 
 
1. (C) Summary: Minister of Finance Benyamin Netanyahu 
resigned on Sunday, August 7th during the Cabinet session in 
which the implementation of the first stage of disengagement 
was approved.  Within hours of Netanyahu's resignation the 
stock market in Israel lost 5.3% of its value.  Late Sunday 
night, Prime Minister Sharon appointed political ally and 
Vice Prime Minister & Minister of Industry, Trade, and Labor 
(MOITL), Ehud Olmert to be acting Minister of Finance. 
Sharon also announced that the framework of the 2006 budget, 
including deficit and expenditure targets, would remain 
unchanged.  Although Netanyahu's move was motivated by 
politics and his opposition to disengagement, his resignation 
may have a significant impact on the Israeli economy and 
economic relations with the U.S., at least in the short-term. 
 While acting Minister Olmert is likely to continue fiscally 
conservative policies, it remains unclear how closely he will 
follow Netanyahu's agenda, especially regarding key USG 
policy objectives.  (Political ramifications of Netanyahu's 
resignation are reported septel.)  End summary. 
 
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BIBI'S GONE, BUT EVERYONE ELSE IS IN THE OFFICE 
--------------------------------------------- -- 
 
2. (C) Shortly after Netanyahu's resignation Prime Minister 
Sharon spoke with the three most senior officials at the 
Ministry of Finance: Director General Yossi Bachar, Budget 
Director Kobi Haber, and Taxation Authority Director Eitan 
Rov.  All three reportedly agreed to continue working in 
their positions despite Netanyahu's resignation.  Working 
level contacts at the Ministry of Finance reported to work on 
Monday morning, despite Netanyahu's sudden departure. 
However, the mood among working level staff was clearly 
anxious.  One senior staffer commented that, "no one had 
expected what happended on Sunday, and no one had prepared 
himself."  The Ministry of Finance staff expects to meet with 
acting Minister Olmert as early as this afternoon.  Olmert 
met separately Monday morning with PM Sharon and the Director 
of the Bank of Israel, Stanley Fisher, to discuss his new 
responsibilities. 
 
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IMPACT ON THE MARKETS 
--------------------- 
 
3. (C) Within two hours of Netanyahu's resignation the TASE 
(Tel Aviv Stock Exchange) lost more than five percent of its 
value (equivalent to approximately a 500 point loss for the 
Down Jones Industrial Average).  PM Sharon attempted to calm 
the markets by issuing statements that the framework for the 
state budget, including deficit and expenditure targets, 
would remain unchanged.  He also moved quickly to announce 
his appointment of Olmert as the acting Minister of Finance. 
On Monday, the TASE gained back nearly two percent of its 
value by mid-day trading.  The foreign exchange market saw 
the New Israel Shekel (NIS) lose less than 1% of it's value 
against the dollar, and mid-day trading stabilized at the 
rate of 4.5170/dollar. 
 
4. (C) A prominent American banker in Israel said that 
although Olmert had told him only ten days ago that he 
supported Netanyahu's policy reforms, Olmert's real test will 
be his willingness to remain focused on those reforms if the 
GOI is thrown into an election season.  He commented that 
another litmus test would be Olmert's willingness to retain 
key reform minded staff (Bachar, Rov, Haber) for the next six 
months.  In terms of the impact on the economy, he noted, 
"this has put all deals on hold!"  In his opinion the five 
percent loss in the TASE was based on lack of investor 
certainty about the continuation of economic reforms after 
Netanyahu's departure.  The true impact of Netanyahu's 
resignation will "only be felt when the NASDAQ opens" (and 
the impact on Israeli companies traded in the U.S. can be 
measured). 
 
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IMPACT ON THE BUDGET 
-------------------- 
 
5. (C) Minister Olmert may make some minor changes to the 
2006 State Budget before it is brought to a vote in the 
Cabinet on Tuesday, August 9.  Netanyahu's draft budget, 
including the one percent increase in expenditures over 2005, 
totals 272.4 billion NIS (about 60.5 billion USD).  The 2006 
budget calls for two dramatic cuts in expenditures -- NIS 1.5 
billion from the Defense budget, and NIS 1.1 billion from the 
budgets of other ministries.  Olmert may consider reducing 
the size of the cuts, but it is not clear how he could 
finance such a change while maintaining deficit and 
expenditure targets.  The Labor Party Ministers have 
threatened to vote against the budget in its current form if 
it is brought before the cabinet on Tuesday. 
 
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IMPACT ON US ECONOMIC INTERESTS 
------------------------------- 
 
6. (C) The GOI remains committed to the framework established 
in the Loan Guarantee Agreement (LGA) with the USG.  Sharon 
reiterated publicly that the GOI would fulfill its 
commitments to deficit and expenditure targets.  Rani 
Lobenstein, Senior Advisor to the Director General, told 
Econoff August 8 that the GOI has not decided if it will be 
necessary to go to the market and raise funds under the LGA 
this year or not.  (Note: The MoF was anxious to receive the 
USG signed copy of the terms sheet in July so that they would 
have "flexibility" in issuing bonds if necessary.  In the 
short-term the MoF may be hesitant to go to the market for 
fear of creating a panic about the stability of the Israeli 
economy. End note.) 
 
7. (C) USG efforts to persuade Israel to improve protection 
of intellectual property, particularly for pharmaceutical 
products, have met with limited success during Minister 
Olmert's tenure.  In the course of negotiations over data 
exclusivity Olmert attempted to achieve a "balance" of 
interests (between US research based and local generic 
pharmaceutical industries).  However, when it became clear 
that a negotiated solution was impossible, Olmert made minor 
unilateral changes to the legislation and championed the bill 
in the Knesset (despite the fact that it did not fully 
address USG concerns).  The patent term restoration (PTR) 
legislation currently pending before the Knesset is supported 
by Olmert and the MOITL.  U.S. companies continue to lobby 
against the PTR bill.  As acting Minister of Finance Olmert 
will assume implementation of the terms of the Loan Guarantee 
Agreement.  One of the key points under the rubric of 
structural reform that the GOI agreed to abide by in June 
2005 is to, "continue efforts to further strengthen IPR 
protection in Israel" (Appendix 6, Section 4). 
 
8. (C) As Minister of Industry, Trade, and Labor, Olmert has 
not taken a formal position on Open Skies negotiations with 
the USG.  However, based on his support for Israeli industry 
and the influence of El Al airlines, Olmert is unlikely to 
advocate a rapid move towards liberalization of the aviation 
sector.  Netanyahu's staff at the Ministry of Finance also 
agreed to include language in the LGA that calls for Israel 
to, "consider entering into Open Skies negotiations with the 
U.S. Government" (Appendix 6, Section 6).  The policy staff 
at MOITL are much less supportive of moving towards open 
skies negotiations, as it would increase competition for El 
Al. 
 
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OLMERT AS MINISTER OF FINANCE, INDUSTRY, TRADE, AND LABOR 
--------------------------------------------- ------------- 
 
9. (C) Comment. Upon assuming duties as acting Minister of 
Finance (while retaining control of the Ministry of Industry, 
Trade, and Labor) Ehud Olmert will in effect dominate the 
economic policy of the GOI.  The only other major economic 
policy advocate will be Bank of Israel President Stanley 
Fisher.  Olmert is a Likud fiscal conservative who believes 
that an open market economy is the best engine of economic 
growth for Israel.  However, Olmert will be forced to balance 
not only the budget interests of competing ministries 
(including his own) but also the economic interests of the 
state with those of large Israeli companies.  In previous 
negotiations with USG and local industry stakeholders, Olmert 
has pushed his agenda despite public criticism and USG 
concerns.  In contrast to Netanyahu,  Olmert can be expected 
to provide more economic assistance for the "disadvantaged 
sectors." 
 
10. (C) Comment continued.  Olmert is a strong advocate of 
disengagement, but his position on the future of the customs 
union between Israel and Gaza is unknown.  In the short-term 
Olmert is likely to rely heavily on his current staff at the 
MOITL for policy advice.  Working relations between MoF and 
MOITL staff are fair, with the most disagreements likely to 
occur over economic policies that affect both the interests 
of Israeli companies and the state budget.  End Comment. 
 
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