How Israel really escaped bankruptcy at 1985

How Israel really escaped bankruptcy at 1985

To understand the example of Israel how it escaped bankruptcy at 1985, a more detailed explanation is needed. In 1977 a new liberal government came to power and tried unsuccessfully to reform the exchange rate policy from fixed and controlled to freely floated currency. This policy brought within few years annual inflation of more than hundred percent. While the government bonds were all fixed to inflation, the private loans and mortgages, mostly guaranteed by the government, had long term fixed interest rates, without being fixed to inflation. This brought huge increase in the government deficit.

In 1980 the liberal finance minister was dismissed and a new finance minister was appointed, who tried new economic policy of budget cuts and credit squeeze. But he was very unlucky. Exactly when he was appointed, the crude oil price, a major import item jumped from 40 US$ to 75 US$ (2010 prices) per barrel, because of the Iranian revolution and the following Iran-Iraqi war, as you can see in the next chart.

http://www.wtrg.com/oil_graphs/oilprice1947.gif

At the same time the US$, to which effectively were fixed most of the Israeli national debts, was appreciated against the Deutsche Mark from 1.75 DM to 2.5 DM per one US$ and continued this trend up to 3.3 DM/US$ at 1985 as you can see in the next chart.

http://static.seekingalpha.com/uploads/2011/12/9/863379-132347215420901-Richard-Bloch.png

The unlucky treasury minister, (Yigal Horvitz) lost the confidence, and was replaced by a new one, who within few years brought with his policy of increasing budget deficit and monetary expansion the Israeli economy to the brink of collapse in 1985. Then a new government, headed by Shimon Peres, (who the first and last time succeeded to make a draw in elections), became the prime minister and implemented a new economic policy of government budget cuts, basic products subsidy cuts, price freeze, credit freeze and the Israeli currency was devaluation by 16% in one day to 1.5 IS per one US$, and immediately frozen for the next three months. Many other changes that may look harsh happened, but against the reality of ten to fifteen percent monthly inflation, that prevailed in the country for several years by then, all this looked as children’s game. Yet, all this would be not enough, if major changes wouldn’t happened in the world economy, like the US$  lost in the same year half of its value, and with it the debts of the Israeli government debts dropped accordingly, and the Israeli export to Europe become cheap. As out of magic, exactly in the same year the crude oil price, a major import item of Israel dropped to one third of its previous value and stayed there for the next twenty years. Greece to make it would probably need the same luck, but after all isn’t the Christian God the same as the Jewish one?