US embassy cable - 05TELAVIV5951

S E C R E T SECTION 01 OF 03 TEL AVIV 005951 
 
SIPDIS 
 
E.O. 12958: DECL: 10/02/2015 
TAGS: EAID, ECON, IS, PREL, ECONOMY AND FINANCE 
SUBJECT: MINISTRY OF FINANCE DG BACHAR CREDITS U.S. LOAN 
GUARANTEES FOR ISRAELI ECONOMIC STRENGTH 
 
Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 (B 
) and (D) 
 
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 Summary 
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1.  (C)  In a September 29 meeting with Ambassador Jones, 
Minister of Finance Director General Joseph Bachar, was very 
upbeat about the prospects for the Israeli economy.  While 
cautious about predicting that the good times would continue, 
he noted the positive effect of the calm of the past year, 
and said that the markets now give credibility to the GOI,s 
consistent policy of fiscal restraint.  He said that the 
policy will not change, despite election pressures.  He gave 
substantial credit for Israel,s recent economic success to 
the Loan Guarantee Agreement (LGA) signed with the U.S. in 
2003.  Saying that this was not yet public information, 
Bachar confided that the 2005 deficit may come in at about 3 
percent, even though the LGA terms were loosened this year to 
allow for a 3.4 percent deficit due to disengagement 
expenses. 
 
2.  (S) Summary Contd.  Bachar noted that he had a 
relationship of complete trust with PA Finance Minister 
Fayyad.  He said that he understood the importance to Fayyad 
of maintaining the customs envelope, but that doing so 
depended on full control being established over the 
Philadelphi Road.  He added &off the record8 that Minister 
Olmert had met with Fayyad earlier in the day, noting that 
this was the first time any Israeli Finance Minister had met 
personally with him.  On U.S. disengagement aid, he said the 
issue was now on hold, and would be picked up again before 
the end of the year.  End Summary. 
 
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Successful Eurobond Issuance 
---------------------------- 
 
3.   (C)   The Ambassador began the meeting by congratulating 
Bachar on the successful Israeli Eurobond issuance the 
previous day.  Bachar said that he was very gratified by the 
market,s reaction, and contrasted it with the days when, in 
the depths of the intifada, Israel could not borrow money in 
the international markets.  He explained that the Eurobond 
issuance was successful beyond expectations.  Rather than 
using another tranche of the U.S. loan guarantees, the GOI,s 
investment bankers had suggested going to the European market 
in order to show an active presence in that market.  The 
original plan had been to float a 400 million Euro issuance. 
However, the market demand turned out to be so great, up to 4 
billion Euros, that the GOI increased the issuance to 750 
million Euros.  The interest rate was 3.78 percent, .53 point 
above the LIBOR (London Interbank Offered Rate), and the term 
was ten years, three years longer than Israel had ever 
previously achieved in this market.  In response to a 
question from the Ambassador regarding Israel,s intention to 
use the LGA in the future, Bachar stated that the GOI fully 
intends to borrow against it in 2006, and that any borrowing 
in Europe would not be at the expense of the North American 
market. 
 
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U.S. Gets the Credit for Israeli Success 
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4.  (C)  Bachar said that the successful bond issuance is a 
reflection of the GOI,s credibility in the international 
markets, which is a product of its consistent and clear 
economic policy over the past several years.  He noted that 
when Sharon,s government took office, it adopted a new 
economic agenda, and implemented it consistently, with the 
backing of the U.S.  He was particularly forthright in giving 
the U.S. a great deal of credit for the success of the policy 
of fiscal restraint, noting that the 2003 LGA &gave us a 
list of tasks to do, and to report back on.8  He said that 
it had become a mantra for MoF representatives ) even in 
Cabinet meetings - to say that they would like to be able to 
spend more, but the U.S. LGA terms do not allow it.  The LGA, 
according to Bachar, gave rise to the policy of fiscal 
discipline, and the GOI is fully committed to continuing it. 
 
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Election Pressures Will Not End Fiscal Restraint 
--------------------------------------------- --- 
 
5.  (C) When the Ambassador asked about how elections might 
affect the government,s ability to adhere to its present 
fiscal policy, Bachar said that when former Minister 
Netanyahu resigned, both the Prime Minister and Acting 
Minister Olmert called to ask him to continue in his post, 
and to continue the same policy.  He pointed out that the MoF 
has a &professional8 staff not subject to political 
pressures, and that only the Minister is a political 
appointee.  While noting that Olmert has been part of 
Sharon,s government since its inception and has always 
supported its fiscal policy, he indicated that under Olmert, 
there may be an added emphasis on social welfare.  He 
clarified, however, that any differences were in the realm of 
nuance rather than on fundamentals. 
 
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Economy Vulnerable to Deterioration in Security 
--------------------------------------------- -- 
 
6.  (C) Asked by the Ambassador about a disengagement &peace 
dividend,8 Bachar responded that anything that contributes 
to an &upbeat feeling8 among the people is  positive for 
the economy.  He said that the relative calm of the past year 
contributed in no small part to the economic recovery, and 
that the careful way the disengagement was handled generated 
a feeling of confidence.  In a note of caution, he added that 
the economy continues to be vulnerable to a deterioration in 
security, citing the recent violence in Gaza as worrisome. 
He said that Israelis are naturally skeptical about positive 
developments, saying that  we have been through the  New 
Middle East8 before,8 specifically during the Oslo years. 
 
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We,ll Help the PA as long as it Doesn,t Hurt Us 
--------------------------------------------- -- 
 
7.  (C) The Ambassador explained the various steps the U.S. 
is taking to push the Palestinian Authority (PA) to act 
against the violence, noting General Ward,s meeting with 
Minister Nasser Yusuf the day before, and Secretary Rice,s 
phone contact with President Mahmoud Abbas.  He stressed the 
importance of doing everything possible to strengthen Abbas 
both with regard to the passages and in the realm of 
economics.  He noted that the Wolfensohn team has estimated 
that there is $750 million in international donations to be 
spent before year end, but that the security environment 
makes it difficult.  Bachar responded that &we will help as 
much as possible, as long as it doesn,t hurt us.8  He added 
that he had heard the PM repeat the same phrase on numerous 
occasions.  Making the situation even more difficult, 
according to Bachar, is the fact that it is not politically 
feasible for the PA to be seen as being directly aided in any 
way by the GOI.  He then noted that the GOI differed with 
many in the international community, including members of the 
Wolfensohn team, regarding the number of Palestinians allowed 
to work in Israel.  He said that while others prefer a more 
&liberal8 GOI policy on the issue, the GOI wants only a 
limited number to be allowed entrance for now, and to reduce 
that number to zero by 2008. 
 
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Complete Trust in Fayyad 
------------------------ 
 
8.  (S) Bachar then went on to say that the basic problem 
between the two sides was that the lack of trust prevented 
agreement even on the simplest of things.  However, he said 
that he and his staff had complete trust in PA Finance 
Minister Fayyad and excellent relations with him.  He noted 
that he and Fayyad had been able to accomplish many difficult 
and complicated things together over the past several years, 
and that Israel started transferring PA money to him in 2003 
- during the time of the worst violence between the 
Palestinians and the Israelis.  In a humorous aside, Bachar 
wished that his relations with others in the GOI were as good 
as his relations with Fayyad.  In an off the record comment, 
he then added that just that morning, Minister Olmert met 
Fayyad face-to-face, in the first such meeting between Fayyad 
and a sitting Israeli Finance Minister. 
 
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Customs Envelope Important to Fayyad 
------------------------------------ 
 
9.  (C)  Bachar said he recognized that the preservation of 
the customs envelope is very important to Fayyad, but unless 
full control is established over the Philadelphi Road, the 
Israeli economy would continue to be damaged, and it would be 
hard to maintain the envelope ) which is why the GOI wants 
goods to pass through Kerem Shalom in the short term. He 
added that Fayyad prefers that Israel continue to collect 
customs duties for the PA, and that it is also a political 
imperative for the PA to not separate Gaza economically from 
the West Bank.  Bachar indicated that once the West Bank 
fence is completed, it would be possible to connect the two 
and treat them as a single economic entity.  He then said 
that his overall philosophy is that &economics drives 
everything (almost).  If the Palestinians are better off, it 
will be a catalyst to help8 (move the peace process 
forward). 
 
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U.S. Post-Disengagement Assistance on Back-Burner 
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10.  (C) The Ambassador noted continued U.S. support for 
post-disengagement assistance to Israel, and asked about the 
status of the Israeli response to the USG,s technical 
questions on the Israeli request.  Bachar said that, given 
the Katrina catastrophe, it was not the right time for Israel 
to press ahead with the request.  The GOI had therefore not 
yet fully addressed the U.S. questions, but would have a 
response by early November. 
 
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