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Bailout For Tel Aviv?
In a surprise move Tuesday, the Bank of Israel cut the interest rate by 50 basis points in response to growing uncertainty in global financial markets and fears that it may reach Israeli markets. Here, a broker checks stock prices in the trading room of an Israeli bank. Getty Images by Joshua Mitnick This week, though, the global panic finally touched down in Tel Aviv, sparking urgent calls for the government to step in to help avoid a mini-crisis in Israel. After watching U.S. and European markets teeter and the cascade of bank failures continue during the Rosh HaShanah break and the following weekend, the benchmark Tel Aviv 25 Index sank 9.4 percent in two days, hitting a two-year low. In the same period, the stock market’s real estate index slumped 11 “Crash in Tel Aviv,” read the headline in the Haaretz business section. With world stock markets reeling even after passage of the U.S. financial bailout, and Israeli corporate bond prices plummeting, pension plan owners pulled their savings out of Israeli capital markets in droves. In a surprise move Tuesday, the Bank of Israel cut the interest rate by 50 basis points to 3.75 percent in what it said was a response to growing uncertainty in global financial markets and fears that it may reach Israeli markets. Earlier, local institutional investors — some of whom saw their assets under management shrink by more than half — warned of a credit crunch for Israeli corporations that could result in a chain reaction of bankruptcies. If Israel wanted to avoid slipping into recession, they said, the government should shore up market confidence with a financial stimulus package. “I hate to break the news, but there are significant problems here,” said Avner Stepak, a managing director of mutual funds manager Meitav Group, who called for the government to act immediately. “The basic problem in the Israeli market today is the local credit crunch. This is a problem that is across the board. Almost every company will suffer.” Stepak declined to specify what kind of rescue plan the government should undertake, except that it would cost only a few billion dollars. Others called for the government to announce a financial safety net for pension plans and an insurance program for bank deposits. However, Richard Gussow, an analyst at Deutsche Bank, said the Tel Aviv sell-off reflected fear of the unknown rather than any concrete weakness in the Israeli economy. “Right now it’s more of a panic than [a problem with] fundamentals. Nobody knows what is going on. It’s just headline-grabbing. People are looking at their holdings now, and they see they lost 7 percent of the equity market and the bond market, and it’s creating a panic,” he said. “With the U.S. apparently going into a recession, and Europe as well, it’s going to affect our economy, no doubt about it,” Gussow continued. “We’re not an island. Having said that, we’re not in as bad shape as the U.S. It’s not like the case of the U.S. where you had a housing bubble.” That’s because unlike U.S. financial institutions that traded in toxic housing debt, Israel banks had relatively little exposure. At the same time, there’s no glut of new housing units on Israel’s real estate market as in the U.S. and Europe. Both the Israeli Finance Ministry and the Bank of Israel also sought to reassure the public that there was no need for a bailout. Stepping in with a financial rescue program would send a message of panic to the stock market, government spokespeople argued. “We aren’t coming out with an emergency package because we don’t think we need it. We need to be very cautious,” Yadin Entebbe, the government’s chief capital markets supervisor, told Israel Radio. “There isn’t any [financial] institution that is in danger of collapsing.” Meanwhile, the central bank hinted that it would consider lowering interest rates in the future, if necessary “The Israeli economy is in a good and stable condition,” which enables it to weather the challenges of global financial crisis, said a statement from the Bank of Israel. “Economic growth and employment is relatively high. ...The banking system in Israel is strong.” And yet, the worldwide financial crisis is pressuring some of Israel’s most powerful businessmen, because almost all have invested heavily in real estate while going into significant debt. Both this week and last, securities of Israel’s sprawling billionaire-controlled conglomerates seemed to be in a free fall: the Arison family — which controls Bank Hapoalim — saw shares in its estate arm lose 17 percent on Sunday. Diamond magnate Lev Leviev watched yields shoot up to 31 percent on bonds of Africa Israel, a holding company that is also heavily invested in real estate abroad. Leviev flew from his London home to Israel to meet with financial analysts and reassure them about the financial health of his company. So if tycoons who control everything from financial services, to heavy industry, to telecommunications go under, would that hurt the economy? Somewhat, but not enough to justify spending taxpayer money on a bailout, says Nehemia Stressler, a top economic commentator at Haaretz. “There's no reason for Mrs. Cohen from Hadera to dig down into her pockets to save the tycoons and everyone that gambled on these bonds,” he wrote. “Israael's budget has limits as well.” In Jerusalem, Israeli lawmakers were also debating the wisdom of a government intervention in the capital markets to calm jittery investors. By sparking demands to boost the 2008 budget deficit in order to pump money into the economy, the financial crisis has complicated Tzipi Livni’s efforts to rebuild a governing coalition. Knesset opposition leader Benjamin Netanyahu of Likud also called for government intervention in the turmoil, but instead of financial rescue he meant a political re-boot: setting a date for new elections (the same remedy he’s been calling for even before the financial crisis). “A free economy isn’t free of all obstacles. It also reaches tipping points and crises ... which demand government intervention,” Netanyahu said. “If we want to stabilize the economy, we need to do one simple thing: hold elections as quickly as possible and set up a new and strong government. Echoing the rising chorus for government intervention, Knesset Member Silvan Shalom of Likud warned that if Israel finds itself in a situation of mass withdrawals from pension plans and medium-term savings funds, it would be a “catastrophe.” Calmed by global gains and messages from the government that it is ready to intervene if necessary, Israeli stocks rebounded on Wednesday from the free fall of Monday and Tuesday. “In general the Israeli economy is stable. To my greatest delight we didn’t assimilate to the culture of Wall Street,” said Labor Knesset Member Avishai Braverman, a former official at the World Bank. He said, however, that the 2009 budget scheduled for approval later this year has been made irrelevant by the financial crisis. The new government must come up with a revised spending plan that invests money in transportation infrastructure and education, he said. “Of course, when America is facing its worse financial crisis since the ‘30s, and there’s a similar situation in Europe, Israel will face a slowdown,” he said, predicting factory shutdowns. “What we face in the next year will be completely different. We need to have a better-functioning government that actually governs.” |
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