Israel's Business Daily Globes reported that the
Ministry of Finance is preparing to issue only unlinked
Government bonds in its monthly approach to the capital
markets in October. According to Globes, the
Government has been a calming influence on the markets, and
in recent months it has been reducing the proportion of
linked bonds to its current level of only about 40 percent
linked to 60 percent in unlinked bonds.
Thus the financial impact of the move will not be that great
if noticeable at all, but the psychological aspect of such an
issue will be large. It should finally help drive home to
everyone that inflation is over in Israel. There was no
official announcement, so that the Bank could postpone the
move if it feels that the time is not yet ripe, but it
appears likely that the time will in any case arrive soon.
One of the last vestiges of the days when Israel's inflation
was some 450 percent a year, removing the links that were
established between the prices of two items is an important
step in making Israel's economy part of the modern global
economy. Such linkage prevents the true power of the market
from asserting itself. Even today, of the total debt, 59
percent is linked to the consumer price index, 32 percent is
linked to foreign currency and only 9 percent is unlinked
debt. This should rise as older debt is retired and new,
unlinked debt takes its place.
Government debt has also fallen below 100 percent of gross
domestic product (GDP) to its lowest level since 1985.
Figures released Monday by the Bank of Israel's monetary
department show that total government debt was down to 99
percent of GDP in the first half of the year, to NIS 427
billion. This reflects a real growth in government debt of
1.1 percent compared to the end of 1999, though GDP grew
more. Total foreign debt reached NIS 115 billion and domestic
debt totaled NIS 311 billion.
Since the implementation of the economic stabilization plan,
the government debt as a percentage of the gross domestic
product (GDP) has fallen consistently. In the past six
months, the debt fell 2 percent.
The debt to GDP ratio is one of the most important indicators
of economic stability. The Maastricht criteria for those
economies wishing to join their currencies with the euro
insist on a ratio of 60 percent. The average among the OECD
countries is 70 percent.
According to the Bank of Israel, the cost of maintaining such
a large government debt is high. The annual interest payments
amount to NIS 20 billion, which is five percent of GDP. The
average among OECD countries is 2.9 percent.
