Devaluation Risk of Shekel Bonds

Dear Members of Colorado Senate Finance Committee and Others:

In response to: SB 13-176, a bill [5] to “authorize the State Treasurer to invest State’s money in debt obligation backed by the full faith and credit of the State of Israel. This paper is to inform Legislators of the inherent risk of investing in foreign currencies and the long term sinking value of Israel’s currencies, which do not seem to be well known and purposely difficult to obtain, but which are historical facts. Such records are blacked out and unavailable from Israel’s Central Bank, which only provides the latest years data. The Federal Reserve Bank of New York does not offer any historic quotes on the Shekel, though it covers most major currencies.

Old 10,000 Israeli Shekel note with a picture of Golda Meir.

Old 10,000 Israeli Shekel note with a picture of Golda Meir.

In 1986, Israel replaced the old Israeli Shekel with the New Israeli Shekel (NIS) at a ratio of 1,000 to 1.

In 1986, Israel replaced the old Israeli Shekel with the New Israeli Shekel (NIS) at a ratio of 1,000 to 1.

The New Shekel (NIS) was adopted in 1985 (made effective, 1/1/1986), as the third currency in Israel’s 66 year history, and its exchange rate was then 1.5 NIS to one US Dollar, from whence it declined to where today 3.68 NIS are needed to buy one US Dollar. This would mean a 59.2% decline in value. From 2003 to 2008 the Shekel actually appreciated briefly in terms of US dollars, recovering about 15% of its decline since 1985. Not withstanding, a New Shekel bond bought for $1000.00 in 1985 would fetch only $410.00 today. [1]

Mechanics of Devaluation
All Colorado permitted investments are dollar delineated for very good reason. (see 24-36-113. Investment of state moneys – limitations) To buy Israel issued bonds the State of Colorado must effectively convert its dollars to Shekels, Israel does not and cannot sell dollar bonds. The present Colorado statues do not authorize a single investment repayable in a foreign currency, and the US Constitution does not allow any State to use another currency except the US Dollar. Foreign currency denominated instruments are open to currency fluctuation and devaluation risk. Interest and principal payments on Israeli bond investment is then paid in Shekels, which must be converted back to dollars before the State can pay bills. Therefore, it is clear if the value of the Shekel declines, as it has done most of Israel’s history, the State would have less dollars to spend.

Foreign currencies are inherently dangerous because devaluation is a political decision. To illustrate, some Coloradans have lost money in Mexican Bank Peso accounts that pay, or used to pay, high interest rates, but have devalued several times, drastically diluting both principal and interest. There is no guaranty against devaluations because it is done in the dark of night by political edict, which is necessarily a secret. The “Full Faith and Credit of Israel” means only that the State of Colorado will get back the same number of Shekels that it invested, but there is no telling how many dollars those Shekels will convert back into. In the past it has usually been less than the amount invested.

In fact, in its short life Israel has devalued its currency many times. Its policy until 2000 allowed constant devaluation. I quote from “Historical Exchange Rates of Asian Countries”:
“Up till now, Israel still maintained a crawling exchange band, where the upper limit depreciates at a rate of 6% per year, the lower limit depreciates at a rate of 2% per year, and the width of band at the end of 1999 was about 44.5%. ” [1]

About eighty separate incidents of Israel currency devaluation and downward “adjustment” were found between 1967 and 2000. [1]

To illustrate the impact of devaluation, be it a creeping one, or sudden, let us look at Venezuela that devalued its Bolívar by 32% in February, 2013. Procter & Gamble Company, which does business there, immediately announced to shareholders a currency exchange loss of between $200 million – $275 million. Every American holder of Venezuela bonds has also lost about 1/3 of their capital. Keep in mind, Venezuela is not a third world State, it is a major oil producer and trading partner with the USA, but this did not stop it from devaluing.

Countries devalue their currencies in order to gain trading advantage over other countries. A nation need not be insolvent to devalue. Some businessmen in Israel now want even greater devaluation to make vacationing there more competitive with Southern Europe and Israeli goods cheaper in the world market. At the present time Spain, Italy, Greece, Ireland, and even France are also candidates for devaluation. London Financial Times, Feb 21, 2013, wrote: “loose monetary policy adopted by major central banks around the world could spill over into a series of competitive devaluations.” [2]

 The future for Shekel bonds can not be known by this writer, nor by the Treasurer of Colorado. Past statutes seem to take for granted that State of Colorado Treasurer has no business taking a currency speculation risk with taxpayer money. Devaluation risk is all the reason that is needed to trash SB 13-176. The legislature should not invite the Treasurer to take unusual risks with State funds by approving investment in any foreign currency, especially not one with a history of multiple devaluations.

Additional possible risk of USA disinvestment: While not necessary to the argument of excess risk of Shekel investment, it is noteworthy that there are growing political, religious, and humanitarian movements afoot to compel the US Congress to curtail aid for Israel’s military establishment. If the US Government were to discontinue military aid to Israel, as it is being increasingly pressured to do, it can be reasonably expected that Israel would have no choice but massive devaluation in order to pay for its military establishment, the largest and most expensive in the Middle East. The likelihood of this happening can not be calculated, but the Legislature should be aware of it.

Past Shekel weakness is largely attributed to Israel’s disproportionately large military budget. The cost of “The 1967 War” and other wars appears to have forced Israel to abandon the I-Pound as its currency. I call the legislature’s attention to one such movement that could have sudden and dramatic negative impact on Israel’s monetary policy.

Fifteen Protestant and Catholic church leaders, having more than 25 million members combined, have formally asked the US Congress for what amounts to sanctions against Israel. They state in part:
“We have also witnessed widespread Israeli human rights violations committed against Palestinians, including killing of civilians, home demolitions and forced displacement, and restrictions on Palestinian movement, among others. We recognize that each party—Israeli and Palestinian—bears responsibilities for its actions and we therefore continue to stand against all violence regardless of its source. Our stand against violence is complemented by our commitment to the rights of all Israelis, as well as all Palestinians, to live in peace and security.”
“We request, therefore, that Congress hold Israel accountable to these standards by making the disbursement of U.S. military assistance to Israel contingent on the Israeli government’s compliance with applicable U.S. laws and policies. As Israel is the single largest recipient of U.S. foreign aid since World War II, it is especially critical for Israel to comply with the specific U.S. laws that regulate the use of U.S.-supplied weapons. We also encourage Congress to support inclusive, comprehensive, and robust regional diplomacy to secure a just and lasting peace that will benefit Israelis, Palestinians, and all the peoples of the region, and the world.” [3] & [4]

I will be on hand at the Finance Committee hearing to raise this issue and answer questions.

Yours very truly,
Charles E. Carlson,

[1] Historical Exchange Rate Regime of Asian Countries:  [Major sources of reference include:
World Currency Yearbook (WCY), IMF Annual Report on Exchange Arrangement and Exchange Restriction (IMF), Bufman G. and L. Leiderman. 2001. Surprises on Israel’s Road to Exchange Rate Flexibility (Bufman)]

[2] From London Financial Times, Feb 21, 2013: “loose monetary policy adopted by major central banks around the world could spill over into a series of competitive devaluations.”

[3] Churches Call For Congressional Investigation Into Aid To Israel:

[4] JVP Rabbinical Council stands with churches challenging US aid to Israel:

[5]The Bill Text: