884A.00 TA/6–2653: Telegram
No. 631
The Chargé in Israel (Russell) to the Department of State
1965. Joint Embassy-TCA message. At regular weekly meeting at Finance Ministry Wednesday, Embassy-TCA representatives and Mikesell presented elements of policy outlined in Department telegram 1139.1 Israelis present at meeting were Eshkol, Koller (members of Finance Ministry Staff). Principal points emphasized were: (1) objectives of hastening viability of Israel; (2) maximizing productive investment and minimizing consumptions; (3) need for attaining internal economic stability; (4) desire to consult on foreign exchange and development budgets with view to implementing objectives set forth in Department telegram 1139. United States representatives pointed out need for examining investment expenditures under government control on basis of priorities as to foreign exchange earning or saving potentialities and optimum utilization of human and material resources.
With regard to debt problem, United States representatives emphasized desirability of avoiding use of program funds for debt repayment, since such diversion would not contribute to viability. United States representatives stated Mission desires to follow very closely debt problem and to consult with Government of Israel regarding means of financing, but referred to statement of Dulles and Stassen that fundamental responsibility for this problem lies with Government of Israel.
In reply to United States representatives’ statement of policy objectives outlined in Department telegram 1139, Eshkol spoke disparagingly of experts and their advice. He also defended Israel’s deficit financing policies in past and stated United States should help Israel in dealing with past debts. Eshkol implied that Israel would continue to borrow as much as possible in future for rapid development of economy in a manner determined by statesmen motivated by faith in Israel and not by experts, bookkeepers and statisticians, and urged the United States to approach Israel’s problem in that light. Eshkol’s response appeared to be based on conviction either that Israel will receive a United States Government refunding loan or alternatively 1954 funds will be available in free dollars for debt management by approaches to Washington without reference to Mission.
[Page 1250]Over the past nine months considerable progress has been made in achieving financial reform in Israel economy by administration of program funds in TCA Tel Aviv. Further progress along these lines and in the implementation of policy objectives of Department telegram 1139 requires firm administrative approach to Government of Israel backed up with threat of aid curtailment. Embassy, TCA and Mikesell concur in view that it will be impossible to obtain Israel adherence to United States recommendations re exchange and development budget and to develop effective aid program without reestablishing primary responsibility here for determination and administration of use of program funds. While special circumstances may justify using modest portion of available funds for debt payment, we believe that negotiations even on short term debt crises, insofar as they concern use of program funds, should take place initially in Israel. This will have following advantages: (1) Mission’s bargaining position re Israel Government would be greatly strengthened. Without such responsibility Government of Israel will continually circumvent Mission and render it powerless to carry out objectives of Department telegram 1139.
(2) It will minimize duality in Israel debt management and tend to place full responsibility with local ministry of finance officials.
(3) Mission in best position to obtain and evaluate information from Government of Israel.
(4) Embassy in key position to evaluate internal political and economic consequences of alternative courses of action, including that of default, and to make appropriate recommendations to Washington for policy determination.
In view of recent developments, furtherance of policies set forth in Department telegram 1139 not only requires transfer to Tel Aviv of initial responsibility for debt problem but perhaps also a reconsideration of past policy of not allowing Israel under any circumstances to default on its external obligations for following reasons: (1) The present policy of preventing default has become known to Israelis and the threat of withholding assistance cannot be employed effectively as a means of achieving our objectives; (2) Borrowing capacity of Israel and hence propensity to expand indebtedness will remain high so long as firm United States policy against default is known to exist; (3) Government of Israel will not make maximum effort to handle debt problem through private channels so long as it is convinced that United States Government will not allow default; (4) Continued failure of Government of Israel to take realistic steps toward viability may require shock of default or partial moratorium as only means of bringing about reforms; (5) It is possible that preventing Israeli default during next fiscal year will require use of bulk of grant appropriation for net [Page 1251] debt repayment. In this event, effects loss of program goods on economy must be carefully weighed against consequences of default.
Transfer of initial responsibility for debt problem to Embassy TCA Israel would necessitate immediate sending of competent financial expert so that he could be briefed before departure of Mikesell and Patterson.