One might argue against the sale of Development Corporation for Israel bonds, aka Israel bonds, to government entities in the USA because the proceeds fund Israeli violations of international law, particularly the colonization of the West Bank, and other activities which violate internationally accepted norms, to include maintaining Gaza as a vast open air prison. But although these policies are likely to have a negative impact on Israel’s credit rating in the future, it is the characteristics of the Bonds themselves, chiefly their illiquidity, which should put them off limits for states and municipalities in the first place. Treasurers and pension fund managers who buy these toxic, illiquid obligations are putting taxpayers and retirees at risk.
In the past Israel bonds were marketed chiefly to the Jewish community as what might be described as “ethnic affinity” investments. But in 2013 the Development Corporation for Israel/Israel Bonds sold \$1.1 billion in Israeli debt obligations in the U.S.A., including some \$300 million to US states and municipalities.
To cite one example, last year the state of Ohio increased its ownership of Israeli bonds from \$40 million to over \$80 million. The state Treasurer, Josh Mandel, the grandson of Holocaust survivors and a college member of the American Israeli Public Affairs Committee, engineered the largest single state purchase of Israel Bonds ever, some \$42 million.
Izzy Tapoohi, the Israeli national who heads the Israel Bond organization in the United States, enthused from his office in New York City that, “Treasurer Mandel’s historic purchase of Israeli Bonds is a great example for fiscal officers who wish to provide a competitive return on taxpayer dollars, while harnessing their state’s economic power to support freedom and democracy…” while Michael Siegal, a member of Development Corporation for Israel’s board of directors and an Ohio resident, commented, “We’re very pleased the treasurer’s office would make a proper decision to support the state of Israel by making a very strong investment for the state of Ohio”.
The chairman of the Israeli Bond Organization for greater Cleveland Alan Gottlieb added “Obviously, we’re thrilled with that…it shows support by Josh Mandel for the state of Israel.” Meanwhile it was left to Mandel’s press secretary, Chris Berry, to explain to the homefolks just how holding more than \$80 million in Israeli paper would benefit them: “Israel Bonds are an attractive option for state and municipal public funds because they maintain a high credit rating, are dependable, and yield a competitive interest rate…3-4 times the rates of comparable US Treasury Bonds.”
But despite what Josh Mandel’s office claims, Israel Bonds are in no way comparable to US Treasury Securities. US Treasuries are the most liquid investment on the planet. If a state or city holds US Treasury obligations and needs cash, the obligations can be sold with ease. The secondary market for US government paper is broad and deep, absolutely the gold standard of national and international liquidity. Raising cash by selling US Treasuries is quick, easy and cheap.
In contrast, Israeli obligations purchased through Israel Bonds are completely illiquid and cannot be resold. The Israel Bonds prospectus is straightforward in this regard:
“There is no secondary market for the bonds and transferability is limited. Except under certain limited circumstances, the bonds may not be transferred, sold or pledged. As a result, no secondary market can develop for the bonds, and they will not be traded on an established security market (or the substantial equivalent thereof).”
Assume, for example, that you are a state treasurer and hold Israeli bonds in your general fund or that you are a pension fund manager with unanticipated needs for cash. You want to sell your Israeli bonds to raise money. Well, you are out of luck; you can’t liquidate your holdings; you’re stuck. You can’t even pledge them as collateral for a loan. This is because unlike virtually every other bond sold in the public market place, Israeli bonds have to be held to maturity, two, three, five or ten years from now.
What happens if a bond holder wants to sell his bonds prior to maturity because he fears Israel’s ability to pay may be impaired? He can’t do it. And what if he decides that there is a risk of an Israeli default on its bonds? He still can’t do it. In my view, the risk of default is increasing because of the apparent breakdown of the Israeli-Palestinian peace process and the emergence of the Boycott, Divest and Sanctions (BDS) movement. BDS has grown and prospered because of the broad perception, especially in Western Europe, that Israelis are not negotiating in good faith and intend to continue the colonization of the West Bank while making the lives of hundreds of thousands of Palestinians, under occupation since 1967, as miserable as possible.
Certainly the Israeli government itself is worried. In 2010 the Tel Aviv based Reut Institute, a think tank thought to have influence at the highest levels in Israel, stated the BDS movement had “already gained strategic significance and may evolve into an existential threat.” And undoubtedly in reaction to BDS’s growing importance, Prime Minister Benjamin Netanyahu mentioned the movement no fewer than18 times during his AIPAC speech this year.
Although Israel’s American enablers have gone all out to crush the nascent BDS movement in the United States, the European Union is taking its own path. European financial institutions have begun to reduce or terminate their relationships with Israeli banks and businesses. For example, citing Israeli violations of international law, the largest banks in Sweden and Denmark have stopped doing business with Israeli banks having branches on the West Bank.
Similarly the Dutch pension giant PGGM announced the sale of its equity holdings in Israel’s commercial banks. And the Dutch water management company Vitens has decided to end joint ventures with the Israeli water company Mekorot to protest Mekorot’s operations in the occupied territories.
EU law and regulations are still evolving with regard to Israeli occupation and settlement of the West Bank, but it is probably fair to say that among the EU’s chattering classes’ patience with Israel and its irksome and utterly unconvincing propaganda is at an end.
Nobody imagined the Apartheid government of South Africa would fall as suddenly as it did. Could Israel face a similar crisis of international confidence? Will slow but steady pressure from the BDS movement effect Israel’s credit worthiness? What would happen to Israel’s ability to refinance/rollover its debt in the face of indictments by the International Criminal Court? Do the citizens of Ohio really want to expose their money to Middle East unknowns and uncertainties?
Israeli dollar denominated bonds merge growing political and financial risk with the inability of bond holders to mitigate their exposure by selling their holdings, a truly toxic combination. It also would appear that Ohio’s acquisition of \$80 million in Israel bonds was driven by political motives, and perhaps a personal agenda, and not by what’s best for Ohio citizens and retirees.
John Taylor lived and worked in the Middle East for a number of years as an archaeologist, banker and international civil servant. He worked for a major US bank in New York, Paris, Athens and London and is a graduate of the Universities of Chicago and Cambridge. He has a Commercial Pilot’s License and has been flying high performance and experimental sailplanes for 30 years.