884A.10/3–1053: Telegram
No. 582
The Ambassador in Israel (Davis) to the Department of State
1426. Joint Embassy–TCA message. Embassy telegrams 1305 and 1306.1
In effort “synchronize” with financial discussions being initiated Washington by Israel Embassy, Foreign Minister Sharett asked me to meet yesterday with him, Minister Finance Eshkol, Avriel and Bendor. Meeting was attended also by Russell, McDaniel and Jones. Principal points made by Sharett follow:
- 1.
- Israel Government has honored obligations undertaken in notes exchanged last September, having avoided further increase in short term debt total. This had been done he said at cost reduction standard of living, deferment development program, and rise unemployment.
- 2.
- Unwieldy short term debt remains, nevertheless, and imposes both financial and administrative burdens. By putting foreign exchange operations on cash basis (paying off all supply creditors but retaining bank fees) Israel Government estimates refunding operations would yield $10 million saving in financial costs. Would also enable Israel Government officials plan more rationally.
- 3.
- While Israel Government has actually reduced total short term debt by over $20 million, shortfall $20 million expected from April 1 through June 30. Sharett stated Israel Government will do utmost meet this itself along lines previously reported (see Embtel 1305). Pointed out, however, that even if successful, Israel Government would be worse off because it might be “mortgaging future”. Will endeavor obtain cash advance from Germans, but if unsuccessful may have to resort to borrowing offsetting reductions thus far this year in short term debt (see Embtel 1306).
- 4.
- Israel Government will in any event have to come to United States Government for “one time” special assistance after June 30. Proceeds to be used only for refunding purposes. Amount not specified.
Comment: While Israel Government has made progress in implementing Mikesell report, and while there are compelling arguments for eventually refunding Israel short term debts, Embassy–TCA feel refunding should, if possible, be (a) disassociated from emergency assistance to avert default and (b) identified with attainable balance of payments objectives and projections that go beyond 12 months.
[Page 1151]This year’s foreign exchange budget now apparently being operated on one shot basis with next fiscal year problems to be met when they arise. While it may be possible to get through June 30 even though German cash payment unattainable or delayed, by rolling back some maturities into next fiscal year, by pledging future income against current borrowings and by incurring additional short term debt, this only means trouble for period after July 1. It provides little assurance, moreover, that Israel Government can yet desist from rebuilding short term debt after a refunding operation and indicated that any refunding operation after July 1 may get involved in emergency financial assistance.
Uncertainty over German reparations agreement has admittedly dislocated Israel Government foreign exchange budgeting this past year. Embassy–TCA feel however, that, even though it may be difficult in this fluid situation, it is essential (a) for Israel Government to start establishing some attainable balance of payment goals and projections going beyond just one year (b) that these goals and projections should give expression to broad economic policy reforms such as outlined in CRANE D–302 and (c) any refunding operation should be related to these two steps rather than to emergency financial assistance.
It is also felt that focus United States influence might now be shifted from that of introducing foreign exchange budget and orderly financial procedures to that of attaining broader policy objectives. Former focus was of overriding importance at time Mikesell report and essential prerequisite to broader economic reforms needed here. Time has now come for United States to use its aid to exert influence toward attaining type of economic reforms envisaged in CRANE D–30.