First Consequences of U.S. Loan Guarantees Hurt U.S. Borrowers

By George Moses

Just before this year's April 15 tax deadline, one of the first financial shock waves resulting from the planned American guarantees of $10 billion of Israeli debt struck in the United States. A bill is pending in the Ohio legislature that would make it possible for the state of Ohio to invest in general obligation bonds issued by the state of Israel. This legislative proposal illustrates all at once the impact of those controversial obligations placed upon the U.S. Treasury, making loans to Israel more secure than loans to U.S. states or cities.

The state of Ohio does not invest its money just anywhere. Its laws are very explicit about which investments the treasurer of that state can make. They include U.S. government securities, securities guaranteed by the U.S. government, obligations of the state of Ohio, repurchase obligations of banks located in Ohio, and a limited amount of the highest rated corporate issues of American corporations.

It is not clear from the proposed legislation whether the state of Ohio invests in the bonds of any other state. What is clear is that until now Ohio has invested all of its operating funds in American institutions.

Israel's Bonds Now "Investment Grade"

The new law would change that. Under this proposal, the treasurer of Ohio would be authorized to purchase bonds guaranteed by the full faith and credit of the state of Israel. With the granting of the full $ 10 billion in American loan guarantees over a five-year period, American taxpayers will have become cosigners for $10 billion of Israeli debt. The practical effect of these guarantees has been to raise the previously abysmal rating of all of Israel's bonds high enough to allow these bonds to be considered "investment grade," despite Israel's well-documented economic weaknesses.

As the bill is written, however, the state of Ohio could purchase any general obligation bond of the state of Israel, not just those formally guaranteed by the U.S. government. Israel would be the only political entity whose debt the laws of the state of Ohio authorize as acceptable for the investment of state operating funds, except for the U.S government and the state of Ohio itself.

This bill is moving forward despite the fact that in terms of the living standard of its people, Israel is a wealthy country It ranks just below Spain and just above Ireland in per capita income as measured by the World Bank. It is probably wealthier than parts of Ohio. Yet, the vote in the Ohio Senate's ways and means committee to move investment out of Ohio and into Israel was 8 to 0.

Until now Ohio has invested all of its operating funds in American institutions.

If the law is enacted, it will have three immediate adverse effects on public and private institutions in Ohio.

First, the pool of money which Ohio uses to lend to its own banks and institutions would shrink by the amount lent to Israel. Those institutions, and counties and cities, will have to go outside Ohio and maybe even outside the United States to complete their borrowing, or pay higher rates of interest, or perhaps both.

Second, the Bank of Israel deliberately is setting a very high yield on these bonds. A cursory review indicates that currently issued Israeli bonds have a higher yield than those of many, if not all, major Ohio cities. This will inevitably put upward pressure on the interest rates those cities must pay. When interest expense eats up municipal tax dollars, programs for Ohio citizens are stripped of those dollars.

Israel is able to pay these high interest rates to investors at least in part because the U.S. government has guaranteed that it will give to Israel as much money as Israel needs to pay its own interest costs on its public debt to the United States. When Israel borrows from the U.S., it is in effect given an interest-free loan. American taxpayers pay the interest. No city in Ohio, or any other state for that matter, gets such good borrowing terms from Uncle Sam.

Third, money borrowed by Israel through its bond sales is not under the oversight of the United States government. Thus, it can be used to fund projects based upon continued Israeli racial and religious discrimination that would be illegal in the United States. Such activities also can involve violations of U.S. policy and/or international law, such as the continuing occupation of southern Lebanon, and construction and operation of prison camps for persons detained without recourse to legal protection and the torture facilities that are specifically condoned by Israeli law.

A Mismanaged Israeli Economy

Israel's economy is badly in need of reform. Israeli politicians of both parties have admitted it, and the United States government has recommended repeatedly that Israel stop squandering its resources through mismanagement of its economy and the adoption of policies it cannot afford. But nothing changes, and mismanagement renders the Israeli economy totally incapable of self-sufficiency.

On May 4, a report from the state financial watchdog, Comptroller Miriam BenPorat, put the cost of the 16-year-old Israeli bank bailout at $9.1 billion, and climbing. Under the terms of that bailout, the Israeli government was to have sold the shares it bought in the banks back to the public by this October. So far it has sold controlling interests in none of the banks, and does not expect to be able to do so by the deadline. Until those shares are sold, the size of the loss is incalculable.

This legislative ploy is probably just the tip of the iceberg. The Ohio initiative is likely to be part of an Israeli 50-state strategy to invade U.S. capital markets to support itself at the expense of American municipalities. Ironically, the financial weapons to make the campaign successful are provided by American taxpayers.

The next few weeks will be critical. Ohio groups are beginning to question the wisdom of sending Ohio's investment resources abroad when they so clearly are needed at home.

If Ohio takes this step, however, other states certainly will follow. If, on the other hand, the measure stalls, Ohio will have demonstrated that it is not as willing to be an uncritical cash cow for any Israeli whim as is the federal government. By defeating this measure, Ohio's state government can send the message that, unlike many of Ohio's representatives in Congress, it puts the needs of its own towns and cities above those of foreign countries.

George Moses is a free-lance writer and political consultant in the Washington, DC area.