In an era in which the term “sovereign debt” is commonly used in a phrase ending in “crisis,” and in which access to funding has become a critical issue for many countries, the idea of a sovereign borrower with access to a reliable funding source that actually lends more when times are tough sounds too good to be true. And if there really is a country with that kind of funding at its disposal, it’s only to be expected that many of its peers would seek to emulate it.
The country in question is Israel, the loans in question are made by Jews around the world and the channel through which the loans are made, serviced and fully repaid is the Israel Bonds organization. Izzy Tapoohi, the organization’s President and CEO, notes that “during its 63 years of operations, Israel Bonds has raised nearly $35 billion in loans, and these funds have played, and continue to play, a significant role in the development of a strong, resilient Israeli economy.”
All parties involved in what is ostensibly a simple financial framework — the Israeli government, the Diaspora Jewish communities and the Israel Bonds organization that links them — make great play of the double entendre implicit in the term “bond”: On the one hand, the word describes a financial obligation that has to be repaid with interest. But on the other, it relates to an abstract, yet very meaningful, link between two entities. A book commissioned a few years ago by the Israel Bonds organization that recounts the group’s history encapsulates this concept in its title — Not Just a Bond: A Bond With Israel. This is a not just an effective marketing slogan, experts say, but a concept that actually works on both levels — and that is the key to Israel Bond’s success.
Mother of Invention
The concept was born out of the harsh realities facing the newly-independent State of Israel. After successfully withstanding the multiple invasions that greeted its creation in 1948, Israel was inundated with Jewish refugees from Arab and Islamic countries in North Africa and the Middle East, as well as Holocaust survivors from Europe. Devoid of natural resources, the country desperately needed the wherewithal to build the infrastructure and industries that would provide employment and housing for the immigrants. Yet its precarious financial condition put normal borrowing channels out of its reach.
Against this background, then-Prime Minister David Ben-Gurion convened the top leadership of the American-Jewish community in Jerusalem in September 1950. His aim was to generate investments in Israel, and he wanted to develop the revolutionary idea floated earlier that year by Henry Montor, one of the Jewish leaders, to offer interest-bearing bonds, backed by the full faith and credit of the State of Israel. Ben-Gurion won approval for the initiative and, within months, the Israel Bonds organization was up and running.
Most of the bond purchasers in those early years viewed their move more as a philanthropic gesture than a genuine investment. Indeed, many had little faith that they would see their dollars returned, with interest accruing. Yet the historical record shows that Israel is one of the very few countries with an unblemished record of meeting its financial obligations, in full and on time — and Israel Bonds is part of that record.
The funds borrowed were not only repaid at maturity, but were put to good use in the interim. The Israeli economy developed very rapidly in the quarter-century after independence — it was the only country to match post-war Japan’s achievement of 10% annual growth over a 25-year period. Then, after suffering through a “lost decade” of high inflation and low growth, Israel “reinvented” itself in the 1990s and emerged in the 21st century as a strong, technology-driven economy.
Along the way, the country’s financial status underwent a metamorphosis, from near-bankruptcy in the mid-1980s to large current-account surpluses in the 2000s. Since 2002, Israel has been a net creditor to the rest of the world — meaning that Israeli entities lend more to foreigners than they borrow from them. This surplus is entirely the work of the private sector, while the government is still a chronic borrower — and necessarily so: The Israeli tax-payer covers the country’s hefty defense budget, but other government aims — notably infrastructure development, especially in the periphery — have to be funded mainly by loans. However, Israel’s overall economic and financial strength now make the government a desirable debtor from the point of view of international financial institutions, observers say.
The Top-Down Version
Israel’s attractiveness as a borrower gives considerable leeway to the Ministry of Finance, which is in charge of planning and executing the country’s borrowing, as to whom to borrow from and on what terms. A particular boon is that, thanks to the country’s high savings rate, it can obtain most of its needs from domestic sources.
“The total outstanding debt of the Israeli government, as at the end of September 2012, was some $168.5 billion,” notes Sigalit Siag, chief fiscal officer and the Ministry of Finance’s most senior representative in New York. “Of this, 82% was owed to domestic borrowers and the remaining 18% to foreigners.
“The foreign debt has three main components: The largest share, currently 39% but steadily falling, is bonds issued by the Israeli government under the umbrella of guarantees from the U.S. government, which makes them safer for the investor and cheaper for the borrower. The next-largest component, of some 31%, comprises Israeli sovereign bonds issued and traded on international bond markets. Only about 24% of the total is made up of ‘Israel Bonds’, which are not traded and hence illiquid and are sold mainly — although by no means solely — to individual investors.”
Siag explains how the Ministry implements its borrowing strategy in a given year: The top-down process begins when the government determines its total borrowing requirement, which is derived from the projected budget deficit for the year, in addition to recycling maturing debt. The size of the deficit fluctuates in line with the domestic and global business cycles, while the relative share of foreign borrowing also varies.
The foreign financing requirement is split between two sources of funding, namely Israel Bonds and sovereign debt issues floated on the markets. Numerous factors influence the breakdown, not all of which stem from immediate funding needs. “The Ministry has a policy of making regular issues of Israeli sovereign bonds on the international markets, so that almost every year sees a new issue denominated in either U.S. dollars or euros,” Siag says.
The other component of the foreign financing requirement is Israel Bonds, and the Ministry gives the organization a “target” or capital-raising goal each fiscal year. In recent years, this has been over $1 billion and it has usually been met or exceeded. Thus, in the five years through 2012 — the period of the global crisis and its aftermath — Israel Bonds’ global sales reached some $1.2 billion per annum, with the exception of 2011, when they dropped to $1.05 billon, although U.S. sales held steady.
This kind of steady performance and ready access stands in sharp contrast to the environment in the international bond markets, which tend to undergo sharp swings from feast to famine. Consequently, although the organization’s target usually comprises a minority of overall foreign borrowing, the Finance Ministry relates to Israel Bonds very positively and invests considerable efforts to nurture it.
That was not always the case. In the 1990s, when globalization took hold and Israel gained full access to the international financial markets, some senior officials in the Finance Ministry — as well as some government ministers at the time — felt that the Israel Bonds operation had outlived its usefulness. They pointed to its high cost of raising funds relative to that for floating bonds on the markets, and claimed that the underlying concept of having to borrow from small investors rather than major financial institutions was anachronistic.
Then came the period of intensified Palestinian-Israeli violence from 2000-2004, which combined with the bursting of the dot-com bubble and a global recession to plunge the Israeli economy into a deep and prolonged slump, exacerbated by a domestic financial crisis in 2002. Suddenly, Israel’s access to global markets was impaired and its ability to borrow was limited to relatively small amounts carrying high rates of interest. Only two sources of funding remained open — the residual quota of bonds carrying U.S. government guarantees, and the Israel Bonds organization.
As had happened 50 years earlier — and consistently in between, whenever Israel faced wars and other emergencies — Jews around the world stepped up to the plate and bought large quantities of bonds, in addition to making philanthropic donations to Israeli charities and NGOs. The skeptics in the Israeli government and civil service were silenced and policy ever since has been to ensure that Israel Bonds remains not just functioning, but vibrant and dynamic. As for the supposedly higher cost of borrowing through Israel Bonds that the government bean-counters claim to calculate — and which Israel Bonds Tapoohi strongly disputes — if it is the case, proponents maintain that it is an insurance premium which experience has proven is well worth paying.
The Bottom-Up Version
To see why and how Israel Bonds works on the ground, let’s turn to Canada. Israel Bonds is a global organization, within which the U.S. entity (whose formal name is Development Corporation for Israel or DCI) is dominant and becoming steadily more so over time. Thus DCI typically raises over 60% of the global total, while Israel Bonds International, which covers Europe and Latin America, contributes some 30% — most of it from Latin America. The remaining 10% comes from Canada which, because of changes in U.S. and Canadian laws in the 1990s, functions as a separate entity, called Canada Israel Securities Ltd. (CISL).
CISL has its own board of directors and tends very much to do its own thing. In part, this is in response to the demands of the Canadian financial and cultural environment. Thus, CISL issues Israel Bonds in two currencies — American and Canadian dollars — each of which carry interest rates reflecting the current state of the markets and monetary policies in the U.S. and Canada; similarly, its marketing and other literature is in two languages, English and French. But CISL is also capable of developing its own initiatives — and these can prove so successful that the much larger U.S. organization is persuaded to adopt them.
One such initiative began as a grass-roots effort at a single Jewish day school in Toronto. Raquel Benzacar Savatti, who serves as chief customer officer for CISL, describes what happened:
“Jewish children have bar mitzvah (for boys on their 13th birthday) and bat mitzvah (for girls on their 12th) ceremonies and kids of that age in Jewish day schools find themselves going to ceremonies and parties virtually every weekend,” Savatti says. “The bar- and bat mitzvah kids typically receive gifts from their classmates and friends and, over the whole year, these will cost the parents anything between $500 and $1,500.
“In 2002, with [violence] raging in Israel, Canadian Jews were looking for ways to show support for the Israeli civilian population being targeted by suicide bombers. The parents of one school suggested that their kids don’t need the games or books that were the standard [bar or bat mitzvah] gifts — and that typically cost around $30-$40. Rather, the gift of an Israel Bond would be more meaningful. The school’s management was very supportive of the idea — and soon other schools were following suit. The kids responded very enthusiastically: They were providing immediate support for Israel and, when the bonds matured five years later, they would receive a significant sum which they could use to help finance their college education, or simply re-invest.”
As with the general Israel Bonds story, this local initiative also not only outlived the specific emergency situation that gave rise to it, but actually expanded much further than anyone could have foreseen. Savatti notes that the Young Builders of Israel program, as it has come to be known, now encompasses every Jewish school in Canada and has raised some $2 million to date.
But she and her colleagues view the absolute amount of money as a secondary consideration, compared to another critical metric. “Through this program there is an automatic expansion in the number of Israel Bond holders every year, and these young recipients thereby learn about both Israel and investments. As a result, all of them are likely to continue investing in Israel Bonds as adults.”
The Canadian program has proven so popular among parents, pupils and school managements, that numerous communities in the U.S. have adopted it as a means of achieving one of the key goals of Israel Bonds, namely to expand the number of bond-holders — especially among the younger generation. For the Israel Bonds leadership, the metric of how many individuals buy and hold bonds is more important, from a long-term perspective, than the absolute amount of money raised in a given year. Every national and local Bonds office, which is comprised of professional staffers along with volunteer lay leadership drawn from community activists, measures itself and is assessed in terms of both of these parameters.
Generating Organizational Change
The man responsible for making sure the Bonds organization hits the annual targets set by the Israeli Ministry of Finance is, for the first time in the organization’s history, someone with a business background and outlook — rather than a politician or diplomat nearing the end of their career, as has been the case hitherto.
The 66-year-old Tapoohi immigrated to Israel from Australia in the late 1970s and became friendly with Benjamin Netanyahu before the latter’s political career took off in the 1990s. During Netanyahu’s first term in office in the late 1990s, Tapoohi served as liaison to foreign investors and coordinated an economic think-tank. In 2009, when Netanyahu returned to power, Tapoohi served on his “First 100 Days” team that developed the new government’s economic policies. Despite their long-standing association, Tapoohi was unprepared for the proposal he received from Netanyahu in 2010.
“When [Netanyahu and then-finance minister Yuval Steinitz] approached me about becoming head of Israel Bonds, I rejected the offer twice within a few months”, Tapoohi recalls. “I said I was too busy and too integrated into Israel from both personal and business perspectives to take on a challenging position in New York.
“But they kept badgering me and eventually I was persuaded. The organization remains a vital, indispensable asset for Israel’s economy, particularly in light of continued geopolitical uncertainty in the Middle East and the fiscal difficulties plaguing many eurozone countries.”
But Tapoohi adds that even he didn’t appreciate “the extent to which Israel Bonds is a totally professional organization and is, in fact, a full-fledged financial firm. I was obliged to sit for and pass the examinations set by FINRA, the U.S. regulatory agency that oversees Israel Bonds, while the staff both in headquarters and in the regional and local offices are all professionals in the sense of having qualifications, knowledge and experience.”
Nevertheless, Tapoohi found much that needed changing in an organization grown staid and which, in some respects, had lost touch with its customers and the environment in which it operated.
The first and perhaps most basic was to re-orient the mindset of everyone connected with Israel Bonds — the professional staff, the lay leadership and the wider circle of bond buyers — away from the old “charity mode,” as Tapoohi terms it. Instead, the emphasis was to be placed on Israel bonds as a financial investment in the accepted sense, as something attractive and worthwhile from the point of view of the investor, “while preserving the emotional component that makes Israel Bonds a unique investment option,” he says.
This re-orientation was mainly aimed at the individual investors who are the bulk of Israel Bonds’ buyers — some 75% worldwide, and 65%-70% (and rising) in the U.S. However, placing the emphasis on the powerful economic rationale for buying Israel Bonds is even more relevant to institutional purchasers than retail ones and this message has been honed and directed with greater precision at investment managers, both in pension funds and other investment institutions, as well as in the city, county and state governments that buy Israel Bonds.
The other changes Tapoohi has promoted are primarily operational. Rather than passively waiting for buyers to make contact, the sales operation has become proactive, reaching out to existing and potential clients in a manner similar to the brokerage firms that Israel Bonds views as competitors for clients’ investment dollars. Indeed, the very term “clients” represents both a psychological and professional adjustment, because hitherto they were called “purchasers.”
However, the call centers and other techniques that have been established or expanded — and that internal data show to have been very effective — are only part of the marketing makeover. Tapoohi has spearheaded a program to make much more intensive use of the Internet as a tool for marketing and, increasingly, sales. “The Israel Bonds e-commerce site is not only more efficient,” he notes, “but even more importantly, it enables us to reach a much younger demographic than more traditional means.”
Digital marketing on financial sites such as Bloomberg and the Wall Street Journal has enhanced awareness of Israel Bonds and broadened its investor base. The results show up less in the overall amounts raised — because big investors are addressed directly — but very dramatically in the number of investment transactions and of individual investors. Since Israel Bonds’ e-commerce site was launched in the fall of 2011, online sales have exceeded $26 million, generated via over 8,600 transactions. In 2012, the site accounted for some 20% of transactions under $1,000 and the organizational goal is to raise this number to 50%. The sharp increase in U.S. sales in 2012 — a 29% jump over 2011 — underscores the success of this business-oriented approach, observers say.
Not surprisingly, especially in today’s global financial environment, other countries are looking at the Israel Bonds model with great interest. Ireland was the first to do so, even before its own severe crisis hit in 2007, but countries as diverse as Greece, Nigeria and India have also found the concept attractive. In theory, any country that can identify an ethnic and/or cultural diaspora — which might even stretch over several generations if it maintains its links with the motherland — could try to reach out to its expatriates or their descendants. In practice, turning vague perceptions of identity into hard cash depends on many factors — not least, the credibility and integrity of the state to which money is being lent. In the case of Israel Bonds, 62 years of unrelenting effort has honed it into a sophisticated and highly effective operation, proponents note, in which every new success sets the benchmark going forward.