Israel may fund Gaza war with US loan guarantees
January 25, 2009
By David Rosenberg
War-related defence spending and civilian aid would boost the budget deficit and increase borrowing, said former treasury official Yoram Gabai, who is now the chairman of the Pe’ilim fund management unit of Bank Hapoalim.
Raising the money at home might impede central bank efforts to cut borrowing costs and revive growth.
“The government must use the US loan guarantees to raise money abroad – a step that needs US approval – to prevent a problem in the domestic market,” Gabai said. In 2003, the US awarded Israel as much as $9 billion in guarantees.
The rise in costs comes as growth eases and tax collections may decline. Morgan Stanley predicted the economy would stagnate next year, after expanding at an average rate of 5 percent in the past five years.
The Tel Aviv Stock Exchange’s benchmark index rose 5 percent during the conflict as investors anticipated that the war would have little effect on the economy.
Last year the index posted its biggest annual loss since 1983 as the global slowdown affected Israel. The shekel gained about 0.5 percent during the conflict.
Israeli warplanes began pounding tunnels used for weapons smuggling and Hamas buildings in Gaza on December 27. Israel sent ground troops into Gaza a week later.
Palestinian militants fired about 800 rockets and mortar shells into southern Israel during the fighting. More than 1 300 Palestinians were killed, said Palestinian hospital officials. Thirteen Israelis were killed
The Palestinian Central Bureau of Statistics said on its website that the conflict left about 4 100 Gaza homes in ruins and cost the Palestinian economy about $1.9 billion.
Israel’s budget deficit might widen to as much as 6 percent of gross domestic product this year, up from about 2.1 percent last year, as tax revenue fell 5 percent, according to Vered Dar, the chief economist at Psagot Investment House.
The finance ministry said on Monday that it would cover the costs of salaries for workers who could not report to their jobs during the fighting. It would also compensate businesses for damage, including lost sales.
The government has declined to provide an official estimate for the cost of the fighting.
The central bank has cut its benchmark rate by 2.5 percentage points in the past three months to a record low 1.75 percent.
Standard & Poor’s (S&P) Ratings Services and Moody’s Investors Service retained their rating for Israeli sovereign debt in reports issued during the fighting.
S&P reiterated its A rating and stable outlook on Tuesday, citing the government’s “commitment to continued fiscal discipline”. Moody’s retained its A1 rating in a January 7 report.
The war had “minor” direct impact on the Israeli economy, trimming just a tenth of a percentage point off economic growth, Gabai said.
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(http://www.busrep.co.za/index.php?fSectionId=561&fArticleId=4807307)
