Archive for the ‘Israel’ Category

India: Solid GDP growth, weak finances

June 14, 2010
India's fractious politics keeps government debt high.  Source: Google Images
India’s fractious politics keeps government debt high. Source: Google Images

In an earlier post, I discussed  a theory I developed that democratic countries with divided, often coalition, governments generally produce weaker public finances than countries where two dominant parties alternate in power.  India is the posterchild for the former, with government debt at about 80% of GDP, very high for an emerging market economy.  In order to keep weak coalitions together, governments must buy off constituencies, at the expense of sound public finances.  We shall see if India’s current government led by the Congress Party can deliver on promises to reduce the government debt burden.

India’s weak fiscal position (with government deficits at around 6% of GDP)  have constrained its credit ratings to low investment grade.  Below find a press release issued today by Fitch in which the rating agency adjusts the rating outlook on India’s sovereign bonds to stable from negative, not due to improved management of government finances, but to stronger GDP growth prospects.  The one-off positive impact on government accounts of recent telecoms auctions also helped sovereign creditworthiness.

CSFB published a note today (also below) explaining how output growth is starting to bump up against capacity constraints.  Fitch forecasts output growth at a healthy 8.5%, though the Reserve Bank of India might tighten monetary policy, keeping the expansion in check.  This is because of another important characteristic of Indian political economy — political sensitivity to inflation.  India is a populous country with high levels of poverty, so when inflation creeps up even a point or two, especially for food prices, people starve (or at least become more malnourished).  In a place as big as India, this can mean millions more malnourished people.  Complicated policy making…

From Fitch Ratings:

Fitch Revises India’s Local Currency Outlook To Stable; Affirms at ‘BBB-‘   
14 Jun 2010 5:33 AM (EDT)


Fitch Ratings-Mumbai/Hong Kong/Singapore-14 June 2010: Fitch Ratings has today revised the Outlook on India’s Long-term local currency Issuer Default Rating (IDR) to Stable from Negative. At the same time, the agency affirmed India’s Long-term foreign and local currency IDRs at ‘BBB-‘. The Outlook on the foreign currency IDR remains at Stable. Fitch has also affirmed the Short-term foreign currency IDR at ‘F3’ and the Country Ceiling at ‘BBB-‘.

“India’s strong growth prospects and the one-off positive impact from the telecoms auctions underpin Fitch’s forecast that government debt to GDP ratio will decline, easing the near-term pressure on India’s local currency ratings. However, public finances remain a clear weakness, and downward pressure on the ratings could resume if India veers too far off the deficit reduction path as outlined by the Thirteenth Finance Commission,” said Andrew Colquhoun, Director in Fitch’s Asia-Pacific Sovereigns Group.

Fitch projects general government debt to fall to 80% of GDP by end-March 2011 (end-FY11) from 83% at end-FY10, reflecting the impact of strong GDP growth on the denominator and the one-off revenues from the 3G licence and broadband spectrum auctions. The agency has revised India’s FY11 growth forecast up to 8.5% from 7% on signs of strong growth momentum, including industrial production growth of 17.6% in April 2010, year-on-year. The telecom licence auctions together netted the government INR1,060bn, representing about 1.6% of projected FY11 GDP, as against the INR350bn budgeted originally (Fitch’s February review of India took the cautious approach of assuming zero auction revenues). The agency anticipates some pressure on the government to spend some of the revenue windfall and estimates an additional 0.3pp spending in FY11, still delivering a net 1.3pp fiscal saving.

However, fiscal management remains relatively weak. Fitch anticipates that the central government’s deficit on the government basis (including privatisation and auction receipts as revenue and excluding some off-budget items) to be at 5.7% of GDP in FY11, just 1pp down from FY10, despite the 1.6% of GDP reaped from the telecom auction. The report of the Thirteenth Finance Commission (TFC) in February laid out a path of deficit reduction towards a “golden rule” of borrowing only to finance investment by FY15. India’s track record on sticking with medium-term fiscal plans is not good, although the Congress-led government has at least voiced its commitment to debt reduction. If the authorities stray too far from the TFC’s consolidation path and debt ratios resume rising, it could impact the ratings negatively.

A significant drop in the country’s growth momentum to below Fitch’s projections would worsen India’s debt dynamics and put downward pressure on its ratings. However, India’s credit profile continues to benefit from the largely local-currency profile of its debt (95% of the stock), and from the sovereign’s stable access to domestic-currency financing, mainly from the banking system. Signs that India’s banking system was under stress would likely be negative for the sovereign ratings, although this is not the agency’s base case. Inflation remains uncomfortably high, with wholesale prices up 10.2% in the year to May, prompting the central bank to hike rates twice in response so far in 2010. An intensified inflation shock that is severe enough to disrupt macroeconomic and/or financial stability would be negative for India’s ratings.

India’s strong external finances, including its sovereign and overall net creditor status and official reserves of USD271bn by June 4 2010 (up 3.6% on a year earlier), continue to support its foreign currency ratings. By contrast, poor physical infrastructure, underdevelopment reflected in low average incomes, and weak governance indicators relative to rated peers constrains the ratings.

Contacts: Andrew Colquhoun, Hong Kong, Tel: +852 2263 9938; Vincent Ho: +852 2263 9921.

From CSFB today:

India
Devika Mehndiratta
+65 6212 3483
devika.mehndiratta@credit-suisse.com
April IP surprised on the upside, with the index rising 17.6% yoy compared with our and consensus estimates of 14.3%. In seasonally adjusted level terms, the IP index had been flat in recent months – after strong gains from June to December 2009, IP was flat in January and February and then declined in March (Exhibit 6). In April, the IP index increased by a notable 3.4% mom.
The large upward surprise in April IP was not that broad-based, however. It was dominated by a 33% mom jump in the capital goods sub-index. This sub-index has been volatile recently (Exhibit 7). It jumped over 30% in December/January, fell back in February/March and was up again by 33% mom in April. A breakdown by product for capital goods is not available for April yet, but data until March showed that these large ups and downs were limited to only a few goods such as computers, ship building & repair, railway wagons, and oil wells/platforms.
Capacity constraints could become an issue. Even if we assume that the broad trend in capital goods (even though volatile) indicates that corporate investment activity is picking up, it is possible that, in the months ahead, capacity constraints start to show up. Anecdotal evidence suggests that industries such as autos, fast moving consumer goods, steel and power are operating near full capacity (the power sector has been capacity constrained for years). This could slow the pace of month-on-month rises (from around 3% pace in April) in industrial production going ahead.
Could the RBI now hike policy rates inter-meeting before the scheduled July meeting? An inter-meeting hike is not entirely inconceivable, but we would still maintain that it is unlikely. This is because: 1) the RBI has indicated ‘cautiousness’ in its policy stance in recent comments, and 2) monetary conditions have anyway tightened in recent weeks triggered by the large one-off 3G auction-related borrowings by telcos. The short-term call rate has consequently moved up from the reverse repo rate (3.75%) to the repo rate (5.25%) without the RBI having taken any policy tightening action since April.

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If the Turks want to hang out with this guy…

June 8, 2010
What would Ataturk say?    Source: Google Images What would Ataturk say? Source: Google Images

Turkish President Gul pictured with the world’s most notorious extremist, who is quoted in the article below as saying that the Zionists are  “holding up the flag of the devil itself…” and are “the backbone of the dictatorial world order,” taking a page again from Julius Streicher’s Der Stuermer.  In its drive to be a regional power, Turkey is starting to make strange bedfellows.  What would Ataturk say?

Maybe Ahmadinejad is pre-empting the Security Council’s likely announcement of tougher sanctions with more hateful attacks against Israel.  But as we know from the Hamas Covenant, the Zionists control the UN Security Council, like almost everything else in the world and throughout history (tongue in cheek, however painfully)…

From Today’s CNN wire service:

Istanbul, Turkey (CNN) — Iranian President Mahmoud Ahmadinejad hit a strident tone on a variety of topics during a press conference on the sidelines of an Asian security summit in Istanbul on Tuesday.

A key item on the agenda at the summit is last week’s Israeli raid on an aid flotilla in the Mediterranean. Ahmadinejad said the confrontation revealed Israel’s “devilish” nature.

“It showed violence and hatred and war-mongering attitudes,” he said at a news conference. “The devilish sound of the uncultured Zionists was coming out from their deceit. … They were holding up the flag of the devil itself.”

The raid led to the deaths of nine people, all Turkish citizens — including one Turkish-American. Turkey is urging Israel to accept an international probe into the incident.

Ahmadinejad congratulated Turkey, which has been in a war of words with Israel following the raid, for its response.

Iran’s own nuclear program has been another major topic at the summit. The United States expects to bring a new resolution on increased sanctions against Iran over its nuclear program to a vote in the United Nations Security Council this week.

By calling for a resolution instead of sitting down for talks with Iran, the United States is “gravely mistaken,” Ahmadinejad said.

“Within the framework of respect and justice, we’re ready to negotiate with everyone. Anyone who is going to resort to the language of force and aggression, the response is clear,” he said.

Ahmadinejad went on to commend Turkey and Brazil for recently negotiating a deal with Iran on a uranium enrichment swap.

“The initiative marked the beginning of a new path — the beginning of an end to unilateralism in the world,” he said.

The United States, he added, missed an opportunity by not embracing the deal.

Asked whether the raid on the flotilla last week will change the way countries vote in the Security Council, Ahmadinejad said the raid will actually change many things.

For Israel, he said, “it has actually rung the final countdown for its existence. It shows that it has no room in the region and no one is ready to live alongside it. Actually, no country in the world recognizes it, and you know that the Zionist regime is the backbone of the dictatorial world order.”

He added, “Maybe at the Security Council, it will impact temporarily. The Zionist regime, with what it has done, it actually stopped its possibility to exist in the region anymore.”

How do you say W in Hebrew: Bibi

June 7, 2010
When is tough effective?

Benjamin Netanyahu subscribes to the George W. Bush school of anti-diplomacy.  It’s nice to blow off steam, especially when you are in the right.  But does brandishing your sword make an effective foreign policy?  Ask Kaiser Wilhelm II, the arch-villain of World War I, whose bluster and belligerence led to the encirclement of Germany, his gravest fear.  Ask most Americans after W left office — did W’s shooting from the hip help America’s image in the world?  Improve America’s security? 

I had meetings with Netanyahu in my capacity as a sovereign analyst for Israel several years ago.  He was then finance minister and a very effective one.  I always came away with the belief that his Achilles’ heel was his hubris.  His narcissism was always the elephant in the room, and more so than the average politician.  I can’t help but believe that his leadership has had something to do with such recent diplomatic fiascoes as the Biden visit and the Gaza flotilla.

Netanyahu, though ineffective, may be right about Gaza.  If you don’t understand why Israel is touchy about Hamas and Gaza, please read the Hamas Covenant in this link, as translated by the Yale University Avalon project, especially Art. 22.  It reads like Der Stuermer.  Here are a few snippets (out of order):

“Israel will exist and will continue to exist until Islam will obliterate it…

The Zionist plan is limitless. After Palestine, the Zionists aspire to expand from the Nile to the Euphrates. When they will have digested the region they overtook, they will aspire to further expansion, and so on. Their plan is embodied in the “Protocols of the Elders of Zion”, and their present conduct is the best proof of what we are saying…

The Prophet, Allah bless him and grant him salvation, has said:

“The Day of Judgement will not come about until Moslems fight the Jews (killing the Jews)…”

In their Nazi treatment, the Jews made no exception for women or children… 

With their money, they took control of the world media, news agencies, the press, publishing houses, broadcasting stations, and others. With their money they stirred revolutions in various parts of the world with the purpose of achieving their interests and reaping the fruit therein. They were behind the French Revolution, the Communist revolution and most of the revolutions we heard and hear about, here and there. With their money they formed secret societies, such as Freemasons, Rotary Clubs, the Lions and others in different parts of the world for the purpose of sabotaging societies and achieving Zionist interests. With their money they were able to control imperialistic countries and instigate them to colonize many countries in order to enable them to exploit their resources and spread corruption there.

They were behind World War I, when they were able to destroy the Islamic Caliphate, making financial gains and controlling resources. They obtained the Balfour Declaration, formed the League of Nations through which they could rule the world. They were behind World War II, through which they made huge financial gains by trading in armaments, and paved the way for the establishment of their state. It was they who instigated the replacement of the League of Nations with the United Nations and the Security Council to enable them to rule the world through them. There is no war going on anywhere, without having their finger in it…

There is no solution for the Palestinian question except through Jihad…

Initiatives, and so-called peaceful solutions and international conferences, are in contradiction to the principles of the Islamic Resistance Movement…

Israel, Judaism and Jews challenge Islam and the Moslem people…

…the ferocity of the Zionist offensive and the Zionist influence in many countries exercised through financial and media control, as well as the consequences that all this lead to in the greater part of the world…”

There you have it.  That’s who’s in power in Gaza.  Hence, the blockade (to prevent the flow of weapons and to pressure Gazans to kick the genocidal extremists out).  History has shown that civilized people should believe what extremists write in their books and manifestos.

As for Turkey, the AK Party did a nice job cleaning up its image in recent years in order to appear to the world as a sort of Islamic version of a European Christian Democratic party.  This has kept Turkey’s secular generals from kicking them out, as they did to the Islamists not long ago. Now, ensconced in power, Turkish Prime Minister Erdogan and his cronies are trying to reorient foreign policy in a more “Islamist” direction, putting ideologues in key foreign policy posts, taking on Israel, championing the oppressed Muslims of Gaza.  Yet, he shows he either hasn’t read the Hamas Covenant or doesn’t care, when he says that Hamas is not a terrorist organization, but a resistance movement (see article).  Sir, is the PKK terrorist or a resistance movement (the PKK is the Kurdish “liberation” movement on Turkish soil that the Turks believe is “terrorist”)?  Were the Turks who murdered masses of Armenians in the early 1900s, which Hitler later said was his inspiration for the Final Solution, genocidal killers?  C’mon, it’s not so hard to tell right from wrong in this world!  Turks should have a re-think about how moderate the Islamism of the AK Party really is.

Israel’s blockade of Gaza could be counterproductive.  It certainly has become a diplomatic liability.  If there is a better way to staunch the flow of weapons to Gaza that Iran is ready to send, if there is a better way to empower those that would topple the would-be committers of genocide running Gaza today, then I say scrap the blockade.  Israel certainly needs to scrap its bunker mentality and engage with the rest of the world, before, like Wilhelmine Germany, it becomes encircled.  P.R. should be a top Israeli priority; and, in order to clean up the country’s global image, Israelis should perhaps start by voting Netanyahu out of office at the next opportunity.  Read about his vehement defense of the Gaza flotilla raid. He may be right, but he certainly is not very diplomatic.  

India: Fiscal worries

April 29, 2010
India: CSFB took a trip there to see what's what.  Source: Google Images
India: CSFB took a trip there to see what’s what. Source: Google Images

Countries with divided democratic government that have to pay off constituencies to hold together coalitions often run up government debt and put at risk not only sovereign creditworthiness, but also economic performance.  I have in mind Italy, Japan, Israel and Brazil.  India, alas, is the posterchild of this phenomenon.  By contrast, governments which alternate between parties or at least between stable coalitions of right and left often manage their debt burdens better.  This is because if you mismanage the economy, you’re thrown out of office.  The U.S., the UK, Germany, Mexico, and Chile come to mind.  Granted, not a perfect rule — Mexico can’t raise much-needed non-oil taxes — but an interesting idea nonetheless.

CSFB took a trip to India to explore how the economy is performing, what the status of reforms are, and what the prospects for infrastructure investment are in this lumbering, rising power that links East to West and has every imaginable problem plaguing Emerging Markets from war, terrorism and ethnic tension, to poverty, growing pains, and inflation.  See CSFB’s trip notes below.

India began reforming its public finances earlier this decade to get its government debt burden on a downward trajectory.  At over 80% of GDP, government debt is high, and with deficits in the double digits, not set to decline.  Luckily, GDP growth has been and is expected to be robust at 6-10% per year.  Yet the country is very poor, with per capita GDP of $1000, making China seem rich with about $3500.  This limits the government’s ability to raise taxes to balance the budget.  Moreover, it imposes a constraint on monetary policy because inflation, especially of food prices, means people starve.  So, an easy money policy has to be considered carefully.  

Like Brazil, India’s problems are domestic — India’s debt is not external.  It has amassed nearly $300 billion in fx reserves and has only a small current account deficit.  The problem of late is that measures to improve public finances over the medium term have fallen prey to politics, as the statement made in the first paragraph suggests they might.  Food subsidies and debt relief for farmers have been increased, and tax rates adjusted down in recent years.  As CSFB noted, a planned direct tax reform is on hold. 

With government finances in difficult straits, the only answer to improving India’s woeful infrastructure situation is through private investment, or at least public-private partnerships.  CSFB writes about these below…

From CSFB 4/29/10:

India
Devika Mehndiratta
+65 6212 3483
devika.mehndiratta@credit-suisse.com
We have just published a new report, India: Trip Notes (with a focus on infrastructure); we summarise our key findings below.
Earlier this month we were in India meeting corporates, banks and the government. Our focus was (1) on-the-ground feedback on sentiment, consumption/investment trends and any updates on government policy, and (2) specific meetings on infrastructure spending prospects in 2010 (year beginning April) given investor interest in this and market optimism that the government is giving a ‘big push’ to infrastructure spending in 2010 (particularly on roads).
Household consumption is apparently quite robust. We met with the CEO of one of India’s largest retail companies, who judged that growth in sales volumes was very strong and that some of the consumer goods companies (e.g., Fast Moving Consumer Goods or FMCG companies) were finding it a challenge to meet demand with their existing capacity. The picture on investment spending is still a bit hazy, however. Overall, while there does seem to have been some pick-up, it is not clear how strong this has been.
Housing prices have run up sharply. As the RBI recently indicated in its policy statement, housing prices in certain areas of Mumbai are already above their previous peak and, in Delhi, average prices are only about 5% below their previous peak. In our view, the RBI could tighten risk weights/provisioning norms for bank lending to the real estate sector sometime this year.
Direct tax reforms could be delayed by a year. In our talks with a senior government official, we learnt that implementation of direct tax reforms (scheduled for April 2011) could be delayed by a year.
On monetary policy, we maintain that the central bank is likely to hike the reverse repo and repo rates by 100bps by March 2011, coupled with more CRR hikes. The RBI stated at its meeting this month that it would like to “calibrate” rate hikes – as we stated then, in our view this implies that the RBI could end up having to deliver some intermeeting hikes in 2010.
We also had focused meetings with key players in the infrastructure sector to try to ascertain if infrastructure spending in 2010 is likely to pick up as strongly as many are expecting. Our meetings suggested that roads (national highways, specifically) is the only sector for which the government is clearly trying to speed up the awarding of new projects. Other than roads, the general assessment is that private sector investment in power is doing well and is likely to continue to do so in the year to come. Investment spending on railways, airports and ports, however, seems to be going on a slow/business-as-usual path.
Even within roads, it is worth remembering the government’s recent thrust is not across all categories of roads but is focused on national highways. Government estimates peg investments in roads (such as national highways, state highways, rural roads) in 2009 at about INR650bn (1% of GDP and 13.6% of total infrastructure investments). Of the total spending on roads, expenditure on national highways is likely to have been around 45%, according to government data.
Although the pace of awarding new highway projects has risen, actual construction activity is likely to pick up more in 2011 than in 2010, in our view. In a typical PPP (public private partnership) highway project, from the time that the project is awarded it takes about six months for financial closure, after which construction can begin. While the projects awarded in the past few months should start from 2Q 2010 (July to September) onwards, the clear step up in highway construction activity is likely to take place more at the end of 2010 and in 2011 (assuming the recent fast momentum in awarding projects is maintained through 2010).
Beyond 2010, many of the specialists we met made the point that financing could become an issue for infrastructure spending. Although land acquisition is highlighted as one of the key constraints in the infrastructure sector, many of the specialists we spoke to were concerned that in coming years financing of infrastructure projects is likely to become an issue, some estimating as early as in 2011. For debt, the Indian infrastructure sector is primarily dependant on credit from domestic banks, and most thought that the banking sector alone would not be able to meet the infrastructure sector’s funding requirements in coming years.

Mideast Update: Watch Clinton’s Aipac speech

March 15, 2010

Bibi was defiant in the Knesset, refusing to halt Jewish settlement in East Jerusalem.  The Obama administration has turned up the heat, higher than at any time since 1991 when H.W. Bush/Baker withheld loan guarantees because of settlements.  This worries Israeli diplomats.  Hillary is set to give a speech at the AIPAC conference beginning in six days.  High diplomatic drama — the Rising Powers blog has been keeping you informed of the current events, the history, and yes, this blogger’s opinions on the stress in the alliance. 

In a past blog, I argued that Netanyahu’s foolishness reaped:

” ..no gain at all for Israel at the cost of modestly damaging US-Israeli relations, which, at least with the Obama administration, could prove hard to repair.  Having met Prime Minister Netanyahu a number of times when I was involved with rating Israel’s bonds, I suspect the buck stops with him. His hubris was behind this, if only in spirit rather than in deed.”

But, I pointed out that on the substance of Jerusalem, one must stop and think:

“…the point that Jerusalem should not be divided, should remain under Israeli sovereignty with strong guarantees for Muslim control over Islamic holy sites should not be dismissed out of hand.”

And…

” A few years ago, the Israeli leftist and peace activist and former Labor minister, Yossi Beilin, said that the deal with the Palestinians should be a swap – a Palestinian state in the West Bank and Gaza (including dismantling most Jewish settlements) in exchange for Israeli sovereignty over Jerusalem…  The nature of any deal is — you give something up, I give something up.  Yet the Arab position, notably in the much vaunted 2002 Saudi peace plan, is, Israel gives something up (withdrawing to the 1967 borders) and the Arabs agree not to make war.  I concede and you agree to take the gun away from my head… 

“Jerusalem is the third holiest city of Islam, but is the holiest spot on Earth for Judaism, not to mention the importance it holds for Christians.  During Jordanian rule over East Jerusalem, Jews were not allowed to visit the Cotel, or Western Wall.  Today, under Israeli sovereignty, the Islamic Waqf administers Islamic holy sites in Jerusalem.  In the West Bank, Jewish shrines have been destroyed under Palestinian Authority rule.  Israel protects Islamic sites under its control.

“The swap – Palestinian state and dismantling of most settlements for Israeli sovereignty over Jerusalem – is the right thing to do in my view. The Palestinian/Arab side has succeeded in moving the debate.  It is now about splitting Jerusalem. In return, maybe, just maybe, the Palestinian side would give up the so-called right of return of Palestinians to their pre-1947 homes in Tel Aviv, Haifa and elsewhere.  (Should Jews demand a return to Morocco, Iran, Iraq, Tunisia and other states where they lost all they had – or even just financial compensation?) This is called staking out an extremist position as a negotiating tactic.  Your adversary may ultimately concede out of exhaustion. Arafat was a master of this strategy, using terrorism and the intifadah as levers. 

“US policy, which many argue is biased toward Israel, inadvertently backed the Arab view on Jerusalem, thanks in large part to the handiwork of Bill Clinton at Taba (and quite frankly of Ehud Barak).  Bubba was guided only by his desire to be the man who brought peace to the Middle East, a sort of redemption for his impeachment over the Monica Lewinsky scandal.  It has been very good PR on the part of the Arabs to move the debate this way, and woeful PR on Israel’s part.  Israel has been woeful at PR since 1967.  But as they say in Texas, that dog won’t hunt.  The debate has already been moved. In order for Israel to obtain international legitimacy, it must negotiate over Jerusalem.”

Regarding arguments made by Stephen Walt, known for his criticism of Israel and the US-Israel alliance, I noted:

“He pushes heavily the argument of Israel’s invincible military and of the paper tigers that are Israel’s regional threats.  I would argue that history has shown that a mistaken belief in one’s invincibility, driven by perceptions from wars past, often precedes a military defeat.  A foreign policy realist like Walt should understand this.  So, friends of Israel would do well to be cautious about how strong they think little Israel, with its small territory, small population, dysfunctional political system, and few allies, is relative to its enemies.” 

And finally, in a piece I wrote on Hillary’s criticism of Israel’s “insult” of America, I noted that support for Israel in surveys of Americans has historically held pretty high:

“…the Secretary of State and the President are entitled to express their feelings of being insulted by Israel, as they were elected to do just that, communicate America’s position vis-à-vis foreign countries.  And, we as voters are entitled to review the Obama administration’s record on this and other issues in 2 ½ years and either keep them there or throw them out.  Polls of American attitudes toward Israel and the Palestinians consistently show over 50% for Israel, while support for the Palestinians remains stuck at below 20%.  Israel’s support rose to 63% in the most recent Gallup poll a month ago, found hereSupport for the Arab side, on the other hand, has crept up from near 10% to the mid-teens over the last 20-30 years.  In any case, Walt & Mearsheimer, I don’t know if these numbers can be explained simply in terms of the so-called vice grip of Jews over Congress and the media.  But, people who live by the polls, often die by the polls, and such numbers can change abruptly, although they haven’t for decades.  I’ll bet the “support for Israel” numbers will dip a bit as a result of the latest ”insult.”  Thanks, Bibi.”

Well, keep an eye out for Sec. of State Clinton’s speech at the AIPAC conference, and Biden’s meeting with Bibi in Washington, where he is coming to speak at the annual meeting of the nefarious but successful pro-Israel lobby.  She may give a peek at her cards, that is, how far the Obama administration is ready to take this, to exploit this diplomatic gaffe to pressure Israel to make concessions.  Trouble is, Netanyahu loves a good fight.

Middle East Update: Lula trip, Biden flap fallout, etc.

March 14, 2010
"Neutral" Lula and his dour friend.  Source: Google Images
“Neutral” Lula and his dour friend. Source: Google Images

The Rising Powers blog has devoted some time in recent days to the diplomatic flap over Israel’s embarrassment of US Veep Joe Biden with the announcement of East Jerusalem settlements.  See recent posts here and here.  To update you, President Lula of Brazil, the one-time labor union firebrand who has united his country of extreme riches and extreme poverty like no one before, is going to take a crack at bringing people together in the Middle East.  Where President Obama has been unable to bridge the gaps in the region, Lula has called on “someone with neutrality” to take a shot. Eh-hem, is that someone Brazilian?  The two-term President of Latin America’s largest economy and member of the exclusive club called BRIC will journey to Iran in May to offer some Brazilian optimism to Ahmadinejad and Khamenei, aka Dour and Dourer.  I wish Lula well.  As a long-time Brazil analyst, I applaud this man’s every effort.  A supremely positive force for the planet, unless you’re trying to protect the Brazilian rainforest.

In other post Biden news, a Maariv columnist was quoted in the NY Times on the subject, saying that Netanyahu is trying to placate both right-wingers in his coalition and the American ally, and thus finds himself dancing at two weddings; where will he be when the music stops? Nicely put!

And, the Biden flap has not slowed the Netanyahu government’s efforts to kill or capture Hamas military commanders and other killers, with the capture today by Israeli forces operating in Ramallah of Hamas terror mastermind, Maher U’dda. Would that the PA would nab these guys, right?

Finally, Hillary is slated to speak at the annual AIPAC Policy Conference which begins this coming Sunday in Washington.  What will she tell America’s nefarious Israel lobby, so successful yet so vilified by Walt & Mearsheimer and many others?

Hopefully, all the drama will move, however slowly, in the direction of peace…and fairness.

Image:  “Neutral” Lula and his dour friend.  Source:  Google Images.

Hillary: Israeli action an insult

March 14, 2010

With the voluble Veep safely stateside, Hillary took off the gloves and expressed just how pissed off she and the Commander-in-Chief are with ally Israel, the behavior of which she found an “insult” to the United States.  I wrote a piece on the Veep’s visit, found at this link and below.  President Obama voiced his anger through his favorite adviser, David Axelrod, on two Sunday morning news shows, though Israel managed to avoid a Sunday morning onslaught, thanks to the prominence of health care this week.  Axelrod was likely told to repeat Hillary’s “insult” language, to which he added the word “affront.”  Language like this is unusual in reference to the US-Israel relationship.  Last time, I can remember things this bad between the two Western allies was during Bush I (HW), when loan guarantees for Israel to help with the settlement of Russian immigrants, provided by the US in light of Israel’s restraint in the face of Saddam Hussein’s Scud attacks in the 1991 Gulf War, were to be withheld due to Jewish settlements on the West Bank.  Then Sec. of State Baker used colorful language to dismiss the power of Jews in America, and H.W. himself, in Walt & Mearsheimer fashion, attacked the Jewish lobby, complaining that he, as president of the United States was “one lonely little guy” against “powerful political forces.” By comparison, when Ariel Sharon told the West in 2001 that Israel would not be sacrificed like Czechoslovakia in 1938, W’s reaction was that this statement was “unacceptable,” exceptionally mild language given Sharon’s broadside.  The Sharon speech came after 9/11, as W was assembling an international coalition to invade Afghanistan and had expressed his “vision” of a Palestinian state, the first time a US President had explicitly called for a Palestinian state.    

Hillary is a gloves-off kinda gal and likes this kind of situation better than making nice; that’s what we all love (and sometimes hate) about her.  She was always Bubba’s spine; we believed her when she said she could handle the call at 3 am.  In fact, maybe this spat with Netanyahu goes back all the way to when Bubba intervened in Israeli elections in the 1990s in favor of Netanyahu’s rivals.  Bill and Bibi never got along, and the Clintons hold grudges. 

In any case, the Secretary of State and the President are entitled to express their feelings of being insulted by Israel, as they were elected to do just that, communicate America’s position vis-à-vis foreign countries.  And, we as voters are entitled to review the Obama administration’s record on this and other issues in 2 ½ years and either keep them there or throw them out.  Polls of American attitudes toward Israel and the Palestinians consistently show over 50% for Israel, while support for the Palestinians remains stuck at below 20%.  Israel’s support rose to 63% in the most recent Gallup poll a month ago, found hereSupport for the Arab side, on the other hand, has crept up from near 10% to the mid-teens over the last 20-30 years.  In any case, Walt/Mearsheimer, I don’t know if these numbers can be explained simply in terms of the so-called vice grip of Jews over Congress and the media.  But, people who live by the polls, often die by the polls, and such numbers can change abruptly, although they haven’t for decades.  I’ll bet the “support for Israel” numbers will dip a bit as a result of the latest “insult.”  Thanks, Bibi.

America is a funny place on the Israel/Palestinian issue.  I have noticed a rising distaste for Israel and a growing sympathy with the Palestinian cause, especially on college campuses.  The fact that the young are increasingly disposed to view Israel unfavorably is worrying to any friend of Israel.  On the other hand, America is divided on this.  I remember driving through Missouri and listening to a Christian radio station that ran a story about a popular church in Indiana that had acquired one of the Jerusalem buses bombed by Palestinian terrorists, killing and maiming Israeli civilians including children, and had placed the remains of this bus on the front lawn of their Baptist church in solidarity with the people of Israel.  As I said, America can be a funny place.  I am sure the politicians are aware of these trends and act accordingly.

Middle East: the Biden Visit — another viewBy Roger Scher

With the trip of the Veep to Israel and the Palestinian territories, there has been extensive commentary on the FPA site about the conflict in the region, including a report arguing for a two-state solution, produced by the Boston Study Group.  I agree with the prevailing view that the Israeli government made a huge gaffe by embarrassing the Veep with the announcement of the construction of 1600 homes for Israelis in East Jerusalem.  No gain at all for Israel at the cost of modestly damaging US-Israeli relations, which, at least with the Obama administration, could prove hard to repair.  Having met Prime Minister Netanyahu a number of times when I was involved with rating Israel’s bonds, I suspect the buck stops with him. His hubris was behind this, if only in spirit rather than in deed. On the other hand, the point that Jerusalem should not be divided, should remain under Israeli sovereignty with strong guarantees for Muslim control over Islamic holy sites, should not be dismissed out of hand.

FPA’s Israel blogger points out that the announcement on home construction, while the voluble Veep was in the region, was a snub at Israel’s most important ally.  As I said, I couldn’t agree more.  On the other hand, FPA’s Middle East blogger suggests that what Israel is ultimately up to is “ethnic cleansing,” a controversial term suggesting the forcible removal of ethnic groups, usually during war and often involving genocidal killing. A polemical, perhaps rabid statement, especially given that the blogger should have included, by his/her measure, the dismantling of Jewish settlements by the Israeli government under heavy international pressure.  Actually, ethnic cleansing is what occurred in the Krajina region of Croatia in 1995, when hundreds of thousands of Serbs were driven from their homes and many killed, as the Croatian army overran the region (with a blind eye turned by the West).  There are many similar such instances of ethnic cleansing.  Should the IDF overrun the West Bank and Gaza and drive Palestinians into Jordan or Egypt, then our friend at the ME blog would have a point.  Till then, pipe down.

The paper featured on the FPA site from the Boston Study Group advocating a two-state solution seems reasonable.  A two-state solution is clearly the best solution to the bi-national competition among Jews and Sunni Arabs for the same territory in the region.  The major problem I had with this document was the inclusion among the authors of Stephen Walt, whose bias against Israel and the US-Israel alliance is well-known.  His inclusion undermines the seriousness of the document.  (More on Dr. Walt below.) 

As for Bibi’s gaffe with the voluble Veep, I am not of one mind.  My principal position would be as noted above that the Israeli government achieved little and lost a great deal.  Maybe Bibi was suggesting that holding off on announcing construction in Jerusalem should be reserved only for a presidential visit.  While President Obama cannot visit every country, he has made Middle East peace (and his special pull in the Arab world) a centerpiece of his foreign policy.  Perhaps he should stop off in Israel some time. Nevertheless, it seems to me that this is an unadulterated diplomatic fiasco for Israel. Way to go, Bibi.  You should stick to economics and limit Yishai and other right-wingers to committees in the Knesset .

My secondary position comes more from emotion and a sense of what is right and wrong.  A few years ago, the Israeli leftist and peace activist and former Labor minister, Yossi Beilin, said that the deal with the Palestinians should be a swap – a Palestinian state in the West Bank and Gaza (including dismantling most Jewish settlements, aka “ethnic cleansing”) in exchange for Israeli sovereignty over Jerusalem.  Believe it or not, that’s what Yossi Beilin said before he participated in the much-more generous Geneva initiative.  The nature of any deal is — you give something up, I give something up.  Yet the Arab position, notably in the much vaunted 2002 Saudi peace plan, is, Israel gives something up (withdrawing to the 1967 borders) and the Arabs agree not to make war.  I concede and you agree to take the gun away from my head. 

History shows that no city should be divided.  Berlin was reunified.  Jerusalem is the third holiest city of Islam, but is the holiest spot on Earth for Judaism, not to mention the importance it holds for Christians.  During Jordanian rule over East Jerusalem, Jews were not allowed to visit the Cotel, or Western Wall.  Today, under Israeli sovereignty, the Islamic Waqf administers Islamic holy sites in Jerusalem.  In the West Bank, Jewish shrines have been destroyed under Palestinian Authority rule.  Israel protects Islamic sites under its control.

Thus, the deal should be a Palestinian state on most of the West Bank and all of Gaza in exchange for Israeli sovereignty over Jerusalem, but with mechanisms for Islamic interests to be under the control of Muslim/Palestinian entities.  Much as the Ottoman Turks allowed the French and Russians to oversee the interests of Christians in Jerusalem in the 19th century, some such mechanism involving a new Palestinian state, the Saudis, Jordanians and the Islamic Waqf could be found. That would be fair. 

Under Jordanian and Egyptian rule from 1948-67, the West Bank and Gaza were not permitted to become an independent Palestinian state, nor were refugees there allowed to integrate into Jordanian or Egyptian society, where other Sunni Arabs live.  A separate Palestinian nationality is a recent creation resulting from the war over Mandate Palestine (which at one time included Jordan, which even today is majority Palestinian).  By contrast, under Israeli rule, there have been Palestinian elections in the territories (much to everyone’s chagrin in Gaza) and a devolution of power to the Palestinian authority. The Palestinians can declare the capital of their new state Al-Quds if they want to, locating it on the outskirts of metropolitan Jerusalem, or they could keep it simply where it is today, in Ramallah.  The Germans moved theirs from Bonn to Berlin, so the Palestinians would likely follow their lead. 

The swap – Palestinian state and dismantling of most settlements for Israeli sovereignty over Jerusalem – is the right thing to do in my view.  Israel’s ultimate leftist, Yossi Beilin, backed this a while back. But, the Palestinian/Arab side has succeeded in moving the debate.  It is now about splitting Jerusalem. In return, maybe, just maybe, the Palestinian side would give up the so-called right of return of Palestinians to their pre-1947 homes in Tel Aviv, Haifa and elsewhere.  (Should Jews demand a return to Morocco, Iran, Iraq, Tunisia and other states where they lost all they had – or even just financial compensation?) This is called staking out an extremist position as a negotiating tactic.  Your adversary may ultimately concede out of exhaustion. Arafat was a master of this strategy, using terrorism and the intifadah as levers. 

US policy, which many argue is biased toward Israel, inadvertently backed the Arab view on Jerusalem, thanks in large part to the handiwork of Bill Clinton at Taba (and quite frankly of Ehud Barak).  Bubba was guided only by his desire to be the man who brought peace to the Middle East, a sort of redemption for his impeachment over the Monica Lewinsky scandal.  It has been very good PR on the part of the Arabs to move the debate this way, and woeful PR on Israel’s part.  Israel has been woeful at PR since 1967.

But as they say in Texas, that dog won’t hunt.  The debate has already been moved. In order for Israel to obtain international legitimacy, it must negotiate over Jerusalem.  That is why I don’t think it was productive for the Netanyahu government to have approved this housing project while Biden was in town.  And contrary to what Stephen Walt and others would say, time is not on Israel’s side.  Israel’s power will decline relative to its neighbors.  So, I agree with the Boston Study Group – a two-state solution is needed now, however unlikely under Bibi.

As for Stephen Walt’s participation in the Boston Study Group paper, he and offensive Offensive Realist John Mearsheimer have argued that US Middle East policy has been captured by Jewish power.  While discussing the influence of the Israel lobby on US foreign policy is fair and the political climate should be one in which criticism of this lobby should not be reflexively labeled anti-Semitism, the vehemence of the Walt & Mearsheimer claims and their clear distaste for Israel undermined their argument.  What’s more, the Walt-Mearsheimer thesis that the US-Israel alliance runs against US interests flies flagrantly in the face of the theory that Stephen Walt himself created, namely, the realist theory of alliances.  According to Walt, alliances that run counter to a nation’s interests will not endure. Well, the US-Israel alliance has endured, Steve, and many, including the voluble Veep, agree that Israel’s security and interests are often in America’s interests, much to your and your buddy John’s chagrin. 

Further, Walt’s chapter in the Boston Study Group report appears eminently reasonable, but reading carefully, one can discern his tilt against Israel.  He pushes heavily the argument of Israel’s invincible military and of the paper tigers that are Israel’s regional threats.  I would argue that history has shown that a mistaken belief in one’s invincibility, driven by perceptions from wars past, often precedes a military defeat.  A foreign policy realist like Walt should understand this.  So, friends of Israel would do well to be cautious about how strong they think little Israel, with its small territory, small population, dysfunctional political system, and few allies, is relative to its enemies.  Finally, thwarted on the conventional battlefield over the last 60 years, Israel’s enemies are finding effective non-conventional means to seek Israel’s destruction, including guerrilla warfare, WMD, human rights calls for one-person-one-vote, one state, the right of return, and an end to “apartheid” in Israel (yes, that means you, Jimmy Carter), the role of the Israeli Arabs, terrorism, the ballot box, usage of oil wealth, etc.  The myth of Israel’s invincibility could be one way Israel-bashers can weaken the state.

Middle East: the Biden visit – another view

March 12, 2010

With the trip of the Veep to Israel and the Palestinian territories, there has been extensive commentary on the FPA site about the conflict in the region, including a report arguing for a two-state solution, produced by the Boston Study Group.  I agree with the prevailing view that the Israeli government made a huge gaffe by embarrassing the Veep with the announcement of the construction of 1600 homes for Israelis in East Jerusalem.  No gain at all for Israel at the cost of modestly damaging US-Israeli relations, which, at least with the Obama administration, could prove hard to repair.  Having met Prime Minister Netanyahu a number of times when I was involved with rating Israel’s bonds, I suspect the buck stops with him. His hubris was behind this, if only in spirit rather than in deed. On the other hand, the point that Jerusalem should not be divided, should remain under Israeli sovereignty with strong guarantees for Muslim control over Islamic holy sites, should not be dismissed out of hand.

FPA’s Israel blogger points out that the announcement on home construction, while the voluble Veep was in the region, was a snub at Israel’s most important ally.  As I said, I couldn’t agree more.  On the other hand, FPA’s Middle East blogger suggests that what Israel is ultimately up to is “ethnic cleansing,” a controversial term suggesting the forcible removal of ethnic groups, usually during war and often involving genocidal killing. A polemical, perhaps rabid statement, especially given that the blogger should have included, by his/her measure, the dismantling of Jewish settlements by the Israeli government under heavy international pressure.  Actually, ethnic cleansing is what occurred in the Krajina region of Croatia in 1995, when hundreds of thousands of Serbs were driven from their homes and many killed, as the Croatian army overran the region (with a blind eye turned by the West).  There are many similar such instances of ethnic cleansing.  Should the IDF overrun the West Bank and Gaza and drive Palestinians into Jordan or Egypt, then our friend at the ME blog would have a point.  Till then, pipe down.

The paper featured on the FPA site from the Boston Study Group advocating a two-state solution seems reasonable.  A two-state solution is clearly the best solution to the bi-national competition among Jews and Sunni Arabs for the same territory in the region.  The major problem I had with this document was the inclusion among the authors of Stephen Walt, whose bias against Israel and the US-Israel alliance is well-known.  His inclusion undermines the seriousness of the document.  (More on Dr. Walt below.) 

As for Bibi’s gaffe with the voluble Veep, I am not of one mind.  My principal position would be as noted above that the Israeli government achieved little and lost a great deal.  Maybe Bibi was suggesting that holding off on announcing construction in Jerusalem should be reserved only for a presidential visit.  While President Obama cannot visit every country, he has made Middle East peace (and his special pull in the Arab world) a centerpiece of his foreign policy.  Perhaps he should stop off in Israel some time. Nevertheless, it seems to me that this is an unadulterated diplomatic fiasco for Israel. Way to go, Bibi.  You should stick to economics and limit Yishai and other right-wingers to committees in the Knesset .

My secondary position comes more from emotion and a sense of what is right and wrong.  A few years ago, the Israeli leftist and peace activist and former Labor minister, Yossi Beilin, said that the deal with the Palestinians should be a swap – a Palestinian state in the West Bank and Gaza (including dismantling most Jewish settlements, aka “ethnic cleansing”) in exchange for Israeli sovereignty over Jerusalem.  Believe it or not, that’s what Yossi Beilin said before he participated in the much-more generous Geneva initiative.  The nature of any deal is — you give something up, I give something up.  Yet the Arab position, notably in the much vaunted 2002 Saudi peace plan, is, Israel gives something up (withdrawing to the 1967 borders) and the Arabs agree not to make war.  I concede and you agree to take the gun away from my head. 

History shows that no city should be divided.  Berlin was reunified.  Jerusalem is the third holiest city of Islam, but is the holiest spot on Earth for Judaism, not to mention the importance it holds for Christians.  During Jordanian rule over East Jerusalem, Jews were not allowed to visit the Cotel, or Western Wall.  Today, under Israeli sovereignty, the Islamic Waqf administers Islamic holy sites in Jerusalem.  In the West Bank, Jewish shrines have been destroyed under Palestinian Authority rule.  Israel protects Islamic sites under its control.

Thus, the deal should be a Palestinian state on most of the West Bank and all of Gaza in exchange for Israeli sovereignty over Jerusalem, but with mechanisms for Islamic interests to be under the control of Muslim/Palestinian entities.  Much as the Ottoman Turks allowed the French and Russians to oversee the interests of Christians in Jerusalem in the 19th century, some such mechanism involving a new Palestinian state, the Saudis, Jordanians and the Islamic Waqf could be found. That would be fair. 

Under Jordanian and Egyptian rule from 1948-67, the West Bank and Gaza were not permitted to become an independent Palestinian state, nor were refugees there allowed to integrate into Jordanian or Egyptian society, where other Sunni Arabs live.  A separate Palestinian nationality is a recent creation resulting from the war over Mandate Palestine (which at one time included Jordan, which even today is majority Palestinian).  By contrast, under Israeli rule, there have been Palestinian elections in the territories (much to everyone’s chagrin in Gaza) and a devolution of power to the Palestinian authority. The Palestinians can declare the capital of their new state Al-Quds if they want to, locating it on the outskirts of metropolitan Jerusalem, or they could keep it simply where it is today, in Ramallah.  The Germans moved theirs from Bonn to Berlin, so the Palestinians would likely follow their lead. 

The swap – Palestinian state and dismantling of most settlements for Israeli sovereignty over Jerusalem – is the right thing to do in my view.  Israel’s ultimate leftist, Yossi Beilin, backed this a while back. But, the Palestinian/Arab side has succeeded in moving the debate.  It is now about splitting Jerusalem. In return, maybe, just maybe, the Palestinian side would give up the so-called right of return of Palestinians to their pre-1947 homes in Tel Aviv, Haifa and elsewhere.  (Should Jews demand a return to Morocco, Iran, Iraq, Tunisia and other states where they lost all they had – or even just financial compensation?) This is called staking out an extremist position as a negotiating tactic.  Your adversary may ultimately concede out of exhaustion. Arafat was a master of this strategy, using terrorism and the intifadah as levers. 

US policy, which many argue is biased toward Israel, inadvertently backed the Arab view on Jerusalem, thanks in large part to the handiwork of Bill Clinton at Taba (and quite frankly of Ehud Barak).  Bubba was guided only by his desire to be the man who brought peace to the Middle East, a sort of redemption for his impeachment over the Monica Lewinsky scandal.  It has been very good PR on the part of the Arabs to move the debate this way, and woeful PR on Israel’s part.  Israel has been woeful at PR since 1967.

But as they say in Texas, that dog won’t hunt.  The debate has already been moved. In order for Israel to obtain international legitimacy, it must negotiate over Jerusalem.  That is why I don’t think it was productive for the Netanyahu government to have approved this housing project while Biden was in town.  And contrary to what Stephen Walt and others would say, time is not on Israel’s side.  Israel’s power will decline relative to its neighbors.  So, I agree with the Boston Study Group – a two-state solution is needed now, however unlikely under Bibi.

As for Stephen Walt’s participation in the Boston Study Group paper, he and offensive Offensive Realist John Mearsheimer have argued that US Middle East policy has been captured by Jewish power.  While discussing the influence of the Israel lobby on US foreign policy is fair and the political climate should be one in which criticism of this lobby should not be reflexively labeled anti-Semitism, the vehemence of the Walt & Mearsheimer claims and their clear distaste for Israel undermined their argument.  What’s more, the Walt-Mearsheimer thesis that the US-Israel alliance runs against US interests flies flagrantly in the face of the theory that Stephen Walt himself created, namely, the realist theory of alliances.  According to Walt, alliances that run counter to a nation’s interests will not endure. Well, the US-Israel alliance has endured, Steve, and many, including the voluble Veep, agree that Israel’s security and interests are often in America’s interests, much to your and your buddy John’s chagrin. 

Further, Walt’s chapter in the Boston Study Group report appears eminently reasonable, but reading carefully, one can discern his tilt against Israel.  He pushes heavily the argument of Israel’s invincible military and of the paper tigers that are Israel’s regional threats.  I would argue that history has shown that a mistaken belief in one’s invincibility, driven by perceptions from wars past, often precedes a military defeat.  A foreign policy realist like Walt should understand this.  So, friends of Israel would do well to be cautious about how strong they think little Israel, with its small territory, small population, dysfunctional political system, and few allies, is relative to its enemies.  Finally, thwarted on the conventional battlefield over the last 60 years, Israel’s enemies are finding effective non-conventional means to seek Israel’s destruction, including guerrilla warfare, WMD, human rights calls for one-person-one-vote, one state, the right of return, and an end to “apartheid” in Israel (yes, that means you, Jimmy Carter), the role of the Israeli Arabs, terrorism, the ballot box, usage of oil wealth, etc.  The myth of Israel’s invincibility could be one way Israel-bashers can weaken the state.

Israel: IDF aids Haitian victims

January 22, 2010
A birth this week in Haiti at the field hospital of the Israel Defense Forces.  Source: IDF
A birth this week in Haiti at the field hospital of the Israel Defense Forces. Source: IDF

Israel has a comparative advantage in medical care and specifically in treating trauma victims, which comes not only from its advanced human capital, especially in technology and health care, but also from vast experience treating victims of terror and war.  Read the NYTimes article  published yesterday on the subject.  Israel has been treating Haiti’s earthquake victims in its mobile tent hospitals set up in the last week in the impoverished Caribbean nation. 

The Times article discusses the ambivalence Israelis are experiencing, concerned about how they treat Palestinians in Gaza, while offering help to Haitians.  There is a difference.  Rockets have rained down on Israeli towns from Gaza for years, where Hamas was elected to office not long ago and where IDF Staff Sgt. Gilad Shalit, 23 years old, has been held hostage for over 3 1/2 years.  Read the hate for Israel contained in the Hamas Covenant to understand the difference between helping Haitian earthquake victims and maintaining a blockade of the Gaza Strip.  This document has been translated and published at the Yale Law School’s Avalon project, where you can go as well for a fairly full documentary history of the Middle East conflict (1916-2010).

Israel’s economy: weathering the storm

November 10, 2009
Source: Google Images
Source: Google Images

Much news and commentary you hear about the State of Israel has to do with geopolitics and the Arab-Israeli conflict (see my colleague Ben Moscovitch’s blog on this site for a nice selection.)  Settlements, will Abbas run or not, Iran’s plans to wipe Israel off the map, Israel’s thoughts about taking military action against Iran, the Goldstone Report on the war in Gaza, films about the war in Lebanon, and on and on. 

Not that this hyper-news about Israel is not important and interesting.  But, let’s step back and look at Israel from a “rising power” perspective — half highly indebted socialist country/half cutting-edge hi-tech and health sciences capitalist upstart.  Its economy has proven itself resilient to the intifada, to the tech bust of nearly a decade ago, and now to the US-led global meltdown. 

How so?  It’s about policy, stupid.  Sound economic policy, begun in the 1980s with a classic monetary stabilization program that reduced inflation, and deepened only a few years ago, by none other than Benjamin Netanyahu, as finance minister, with his Thatcherite restructuring of the economy (e.g., increasing the labor force participation rate by creating incentives for the religious to work) and his shift to a rules-based fiscal policy.  Israel still has a high government debt burden — above 80% of GDP.  But that is down from above 100% not long ago.  Meanwhile the rest of the world has caught up to Israel’s debt levels (with the U.S. now surging higher). 

On the external front, the country couldn’t look better — $60 billion in foreign exchange reserves, a current account surplus, and “net external creditor” status, that is, Israel’s claims on foreigners exceed foreigners’ claims on Israel (oh, how the U.S. would love to have that balance sheet!)

So, in spite its modest size, constrained by the country’s small population, the Israeli economy dwarfs those of many of its much poorer and poorly run neighbors.  Have a look at the Fitch press release below referencing a recent report on Israel and its sovereign credit outlook.

Fitch Affirms State of Israel at ‘A’/’A+’; Outlook Stable   
06 Nov 2009 8:22 AM (EST)


Fitch Ratings-London-06 November 2009: Fitch Ratings has today affirmed the State of Israel’s Long-term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’ respectively with Stable Outlooks. The Short-term Foreign Currency IDR is affirmed at ‘F1’ and the Country Ceiling at ‘AA-‘.

“Israel has fared better than many other small, open economies in the recent global economic and financial downturn, suffering only a mild recession compared to rated peers in Europe and Asia,” says Paul Rawkins, Senior Director in Fitch’s London-based Sovereigns team. “Nonetheless, the downturn has exposed Israel’s key vulnerability to shocks, namely a high public debt ratio that looks set to exceed 80% of GDP in the wake of wider fiscal deficits in 2009-10.”

Fitch says an improved macroeconomic policy framework, coupled with structural reforms since the last recession in 2001-02, laid the foundations for strong growth in 2004-08, in line with the ‘A’ median of 5%, rendering the economy markedly more resilient to shocks. With the exception of Bahrain, China and Poland, Fitch expects Israel to be the only country in the ‘A’ range to escape an outright recession in 2009. This performance is attributed largely to aggressive monetary and exchange rate policies, aided by a relatively trouble-free banking sector and an absence of asset price bubbles. Structurally, Israel’s high-tech manufacturing and services sectors have proved unexpectedly resilient to declining global investment demand, presaging a near record current account surplus in 2009.

Israel’s high public debt ratio remains the key constraint on its sovereign ratings. The adoption of rules-based fiscal policy in the wake of the last recession has served Israel well; limits on the growth of public expenditure and a ceiling on the state (i.e. central government) deficit facilitated a contraction in general government debt to 78% of GDP at end-2008 from a peak of 100% in 2003. Even so, this ratio remains high relative to the peer group median of 37%, although it is not the most extreme (‘A-‘ rated Greece exceeds 100% of GDP). Moreover, considering the mildness of its recession and an absence of financial sector-related support, the current external shock has taken a heavy toll on the public finances, chiefly on the revenue side. Fitch expects Israel’s general government deficit to widen to 6%-7% of GDP in 2009-10, on a par with rated peers Malaysia and the Czech Republic, which have experienced much steeper recessions, while pushing general government debt up to over 84% of GDP by end-2010.

While Israel’s experience with fiscal rules has been mixed, the current framework has entrenched fiscal discipline and together with signs of a strong economic recovery, suggests Israel’s powerful public debt dynamics could reassert themselves by 2011, forestalling any further deterioration in the public debt/GDP ratio. The government envisages a sharp narrowing in the state deficit to 3% of GDP in 2011 (from 6% in 2009), but still hopes to adhere to tax cuts over the medium term. Fitch expects some revision to the fiscal rules, with greater prominence being given to the Maastricht public debt/GDP ratio of 60% of GDP. From a rating standpoint, a positive rating action would require a decline in the debt/GDP ratio to a level nearer to the ‘A’ median. Conversely, a prolonged rise in the debt/GDP ratio and/or sustained fiscal easing would prompt a negative rating action.

Externally, the Government of Israel became a net external creditor for the first time in 2008, although it still falls short of ‘A’ norms on this measure. Burgeoning international reserves – these have more than doubled to USD60bn since end-2007 – have been the key factor behind this status change for the sovereign, facilitated by a strong current account surplus and buoyant net capital inflows. The economy as a whole also passed a new milestone in 2008, registering a surplus of external financial assets over liabilities for the first time. Israel expects its standing on the international stage to be further enhanced by OECD membership in the near future.

Contact: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239; Richard Fox, +44 (0) 20 7417 4357

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on http://www.fitchratings.com.