A Small Country Big Trouble, Not Cyprus, Israel

Worldwide, stock and bond markets are convulsing over reports of financial failure in Cyprus, the little island that looks like a turtle with its long neck pointing at Turkey, a chip off the European Union, bitterly divided ethnically by warring factions. Its insolvent government and failing banks have anxious and hopeless depositors lining up at ATM machines all night long. Cyprus is a land of frozen assets and fear…. depositors can only say of the bankers, “why did I trust their words?”

A few miles East on the Mediterranean shore, is Tel Aviv, where it is business as usual. Israel was just honored by a visit from the U.S. President; Israel’s secretly indebted banking system funds a militarist economy that boasts of power but leaks at every seam. It is the consummate actor, feigning prosperity while it hovers on the brink of national financial suicide.

Much like Cyprus, Israel is deeply dependent on tourist money for its day to day existence. It borrows with little future capacity to pay back, except by borrowing more. Israel is an economic fantasy; it lacks natural resources, water or arable land. Yet Israel has chosen to weigh itself down by a giant military machine, bigger and more costly than countries many times its size.

What keeps Israel going? Will it ever go belly up, like Cyprus? Israel is near becoming a three-time loser; it counts on surviving its next financial crisis by passing its losses on to unknowing Americans through their pension plans.

Who pays Israel’s bills?  It has never been a secret that Israel has been kept alive from the beginning by the variously categorized donations from U.S. taxpayers, which the U.S. government calls foreign aid.  But due to the declining purchasing power of the Dollar, the more than $3 billion a year military aid is not nearly enough; Israel is looking for more money. It has always sold bonds to Jewish supporters worldwide. What was not know by this writer is that these early bonds were issued in US Dollar denominated. About a decade ago it initiated a plan to sell bonds to many more Americans, through states, cities, and retirement funds. These are dollars that keep U.S. local state government going, and must not be at risk.

Israel, a two-time loser with a secret to keep. We all know what happens to us if we continue borrowing; Israel knows, too. The bond sales must be paid back, or the maker must someday default. That is how bonds work because interest compounds on top of interest. This is what has happened to Cyprus banks.

What is little known, is that in its 65 year history, Israel has already reneged on its currency twice, washing away its debts by devaluing the underlying currency and then reissuing a new one, and pretending it never happened. Israel hides her financial history cleverly with half truths like this one: “Israel has never missed an interest or principle payment on a bond.” American state and local leaders accept, or pretend to believe, Israel’s claim that it is solvent, and buy Israel’s bonds (I-Bonds) with taxpayer money.

Many conscientious American Zionists bought Israeli bonds in its first 20 years. I remember street sales in major cities. These 12 year “savings bonds” were issued in dollar denominations and, according to Jewish Telegraphic Agency 10/24/1962, $24.5 million were to be retired in 1963, but by this time Israel had already sold $563 Million of dollar bonds outstanding, over $20 for every $1 redeemed. These early bond were the bait for much bigger issued to come.

The latest advertising by Israeli Development Corporation (IDC), an organization set up to market Israeli bonds, boasts that “U.S. 2012 Israel bond sales set a new record, with total investments exceeding $816 million. The sales represented a 29 percent increase over 2011. Worldwide sales also rose, surpassing $1.2 billion.” It appears from this announcement that about 2/3 of Israel’s bond sales are in the United States. This is in addition to the $3.0 billion in the foreign aid we are told the U.S. federal government gives to Israel every year.

The IDC also claims: “Ohio Treasurer Josh Mandel completed the single largest Israel bond investment by a state — a $42 million purchase that increased the total amount of Israel bonds in the Ohio Treasury’s portfolio to over $80 million.” Do Ohioans know this? IDC claims that some 80 cities and state governments and employee pension plans have now invested their taxpayers’ money in Israeli bonds.

The January 1, 2013 Prospectus for Jubilee Seventh Series, Israel-Dollar bonds, obtained from IDC, discloses that in the last two years, they have sold $735 million of this one series in the U.S.  The Jubilee series introduced a new, audacious concept, in that they are not payable in Israeli money, but in U.S. dollars. And the prospectus warns in the last pages that no American has legal status to sue Israel for non-payment.

It is fundamental to understand that Israel can never repay I-Dollar bonds, or even the generous interest it offers, except by selling more and more I-Dollar bonds. The reason is that only the U.S. can print dollars, just as only Israel can print shekels. To do otherwise is called counterfeiting, as we explained in our March 8 article, “How Israel is dodging its bad credit history by selling Dollar Bonds“)

Let us look at a few examples: The state of Colorado cannot legally invest in foreign government securities for very sound reasons. But Senate bill 2013-137 would allow the Colorado Treasurer to buy Israeli bonds — only Israeli bonds. We suspect Israel’s lobbies are behind the bill. The bill was pulled from the Finance Committee hearing after a challenge, in which this writer had a part, was mounted.

I discovered the real target was not the state treasury’s temporary, unspent tax money, but the massive long-term funds managed by the Public Employees Retirement Associations (PERA) say, $40 billion. I asked PERA if it already owned Israeli bonds; an official’s e-mailed response was: “PERA does have investments with a market value of about $832,000 in more liquid publicly traded bonds issued by the State of Israel.”

It seems the change in law is not really needed in Colorado; the retirement fund billions may be invested wherever the managers decide. But Israel is not a safe investment choice, any more than Cyprus is.

Israel has organized 25 sales offices in the United States for the sale of I-bonds. Keep in mind that it must sell enough new bonds each year to pay off those that mature, plus the cost of its sales staff, plus all the promotion and lobbying to legitimize sales in the U.S., and to fund whatever it is that Israel is raising the money for.

Besides offering larger returns, Israel’s bond salesmen use major deception to sell the bonds. They say in their advertising, “Israel has never missed payment of principal or interest since the first Israel bonds were issued in 1951.” This is a half truth used to deceive Americans. Israel may have paid principal and interest, but did the currency they paid buy anything?

As I detailed in my Feb 24, 2013 article, Devaluation Risk of Shekel Bonds, Israel’s Achilles heel is its incredibly bad history of de facto defaults on past currencies by devaluation, which it has done twice to investors between 1948 and 1985, And its present NIS (New Israeli Shekel) has lost some 59% of its value since being issued in 1986 to replace the worthless (old) shekel.

Israel acts with such authority its dismal credit history is hard to believe, but a surprising disclosure of was printed a year ago in Israel’s large daily, Haaretz. Requiem for the Shekel states:  “The State of Israel is only 64 years old, but it has had three different currencies – the lira, which replaced the Eretz Israel lira; then the old shekel; and then in 1985, the new shekel. Now, 26 years after that last change, the Bank of Israel is considering changing the name of the country’s currency once again, in 2013, when it issues a new series of banknotes. The new currency will probably be called the Israeli shekel.”

It seems the Israeli bankers reasoned that investors might wonder why a “new” Shekel was needed, unless something had gone amiss with the “old” shekel.  The Haaretz story contained the following admission about Israel’s pre-1986 years: “We then entered a period of high inflation. The treasury considered inflation of only 10 percent a month an achievement. Of course the shekel lost value, and that same package of coffee cost 10,000 shekels.”… A cup of coffee cost 20,000 shekels in regular restaurants and 30,000 shekels in expensive restaurants, and the currency’s value declined every day. People stopped talking in shekels and started talking in dollars, and one dollar was worth 1,500 shekels. And then they said ‘All right, now we’re dividing everything by 1,000,’ and invented the new shekel.”  “The new shekel’s value was set at 1,000 old shekels. The raging inflation had become hyperinflation, soaring to more than 500 percent a year. National debt shot up to more than 80 percent of GDP.”

Yes, that was Israel, not Cyprus. Haaretz stops short of telling readers what this did to shekel-bond holders; Yes, they may have been paid every shekel, but the shekel was worthless.  We should ask, why would any American public official, paid by taxpayers, risk investing a dollar in a country with a history of losses and running what looks like a perpetual musical chairs bond scheme? Would your legislators loan taxpayer money to an investor who has gone through bankruptcy twice and is borrowing more money at every opportunity?

The over-the-top risk of default for Israeli dollar bonds: No country wants to destroy its own money, especially not for a third time, which is why Jubilee Series Seven (Israeli dollar denominated bonds) is such a brilliant scheme for Israel, giving it two currencies in circulation at the same time. Israel can, at any time, default on dollar bonds (payable mostly to Americans) and go on paying interest to Israelis on NIS denominated bonds! As far as I know this is unprecedented, making Israeli bankers de facto licensed dollar counterfeiters, legitimized by the US Securities and Exchange Commission that approved the Jubilee Dollar Bond Prospectus. How different is this from printing USA $100.00 bills? For more detail: How Israel is dodging its bad credit history by selling Dollar Bonds

You can find out if your state or city is investing in Israeli bonds with a couple of phone calls… it should be public information. Think about those folks in Cyprus, standing in line to get to the ATM machine in front of the bank.