Borrowing from ‘them’
Is there a real threat of Israel “becoming like Greece and Spain”? Could this country lose access to the international markets, so that no-one would want to lend to us? On what basis do creditors stop lending to countries that want to borrow?
Those were the central questions posed in last week’s column. The answer to the first question is that there is no substance to the shrill and melodramatic threat being hurled at us at every opportunity by our silly, childish and theatrical Prime Minister and Finance Minister. One reason, entirely sufficient in itself, is that Israel has become a net creditor to the world. It owns more financial assets overseas than the rest of the world owns here. In that sense, it doesn’t actually need to borrow. But the government does have a large and growing budget deficit, and the country has a large and growing deficit in its global trade. Why we have those deficits and who is responsible for them is open to debate, but what is undeniable is that they need to be financed. That means we need to borrow, because we don’t want to sell assets to finance what ought to be a temporary shortfall; that would be equivalent to drawing on your pension scheme or selling your home, to cover some unforeseen expenses or a temporary drop in income.
If we are so strong financially, to the point that we are net creditors to the world, there should be no problem raising loans in the international markets – and certainly no risk of losing access to them. However, the markets themselves have become both panicky and finicky, whilst the lenders – banks and large financial institutions – have serious problems of their own to deal with. Banks, in particular, are hoarding cash and are loth to lend to almost anyone, whether households, businesses or even sovereign countries. Maybe their behavior is insane, or maybe it is actually the acme of sanity – either way, there is a significant danger that we will lose access to the markets not because we are not good debtors, but because the potential lenders are not good creditors, or simply because the markets themselves have become dysfunctional.
Fortunately for us, Israel does not have to rely very much on foreign borrowing via either banks or the global bond market. The Israeli public generates a large pool of savings, which ideally are invested in the private sector, but which the government can access when it needs to. Obviously, a situation in which the government consistently demands the lion’s share of domestic savings will have a cumulatively negative impact on the economy – indeed, that is how Israel got into severe trouble in the early 1980’s, and how other countries have done the same recently or are doing so currently. But having a pool of domestic savings is critically important.
Israel also has a source of finance and a borrowing instrument that is unique to it – although quite a few countries would dearly love to have something similar. I have myself been tangentially involved with two countries, one highly developed, the other decidedly undeveloped, which wanted to emulate us in this respect. This source is Diaspora Jewry, and the instrument which Israel uses to borrow from individuals around the world is Israel Bonds. In recent years, when Israel’s borrowing requirements have been low, Israel Bonds has chugged along quietly, raising an average $1.1bn per year. Of this, more than three-quarters comes from individuals, the rest from financial institutions such as pension funds, which appreciate the advantages offered by Israel Bonds – both the security of “return of capital”, from a borrower that has never missed a payment, and the attraction of “return on capital”, i.e. the reasonable rate of interest offered, especially in the current environment in which US Treasuries pay next-to-nothing.
In times of crisis, whether geo-political/ security or economic/ financial, Israel Bonds could raise much larger sums, probably double, possibly triple – although it would be preferable not to have to find out. Given that lenders will only lend at all – let alone more — if they trust the borrower to repay the loan, it is vital to understand the two reasons why ‘they’ trust us. One is the normal criteria whereby creditors assess borrowers, and here the historical record of Israel Bonds and the State of Israel, now buttressed by Israel’s much stronger overall financial position, speaks for itself.
The other is the feature makes Israel Bonds unique, probably inimitable. The lenders are not a foreign, remote, impersonal entity, a conceptual “them”. “They” are actually “us”, an extended family in which, when one branch is in trouble, the others step up to help out.