Tel Aviv – Israel’s economy, which for a decade rode the wave of globalization and liberalization to high growth, now is bracing for the shock waves of the U.S. financial crisis to hit home.
“A financial tsunami is nearing and Israel may face recession,” Israeli Defense Minister Ehud Barak warned Tuesday.
But few analysts expect a recession, with most insisting that Israeli banks remain fundamentally sound. They do expect, however, that economic growth will slow considerably.
“The driving force of economic growth in Israel is its exports – particularly hi-tech exports – and about one-third of our exports go to American markets,” observed Omer Moav, a professor of economics at the Hebrew University of Jerusalem and the Shalem Center in Jerusalem.
“If there is an economic slowdown in the West, it will have a potentially huge impact on the Israeli economy.”
Shlomo Maoz, the chief economist at Excellence Nessuah, a brokerage based in Ramat Gan, said he expects to see signs of the slowdown by the end of this year and the beginning of next year.
“The economy is still strong, even though the pace will drop. … It won’t bring a big shock.’’
Just to make sure, Bank of Israel Governor Stanley Fischer met Wednesday with the chiefs of Israel’s banks to assess the fallout from the crisis on the local banking system. Although the banks have issued public statements about their exposure to the American institutions that faltered, such as Lehman Brothers, Fischer wanted to make sure he wouldn’t be blind-sided in coming days.
“Fischer is afraid that Israeli financial institutions haven’t discovered or fully identified their exposure to the American markets,” explained Sami Peretz, the business editor of Haaretz. “There is exposure to banks that folded. There may be exposure to other institutions” that are teetering.
After the meeting, Bank Hapoalim CEO Gila Maor was quoted as saying there was “absolutely no reason for concern.”
The Tel Aviv Stock Exchange’s TA-100 index of the 100 largest public companies plunged a total of 6.8 percent Monday and Tuesday as world markets shook with news of the bankruptcy of the U.S. investment bank Lehman Brothers, the hurried buyout of Merrill Lynch, and the uncertain fate of other financial companies, most notably American International Group, the world’s largest insurance company whose commercials are omnipresent on Israeli TV.
It was the worst financial crisis since the Great Depression began in 1929. In those two days, world markets saw more than $1 trillion in value wiped out. In Moscow alone, stocks dropped 11.5 percent on Tuesday before trading was halted.
The Tel Aviv Stock Exchange settled down Wednesday after the U.S. Federal Reserve announced late Tuesday that it would provide AIG with an emergency $85 billion loan to ensure its financial stability.
Fisher had met Tuesday with Israel’s finance minister, Ronnie Bar-On, who told Israel Radio Wednesday that he had “confidence in the financial system in Israel. The Israeli market is different from the American market and Bank of Israel Commissioner Stanley Fischer is familiar with both markets and is an expert in handling crises.”
“This crisis is catching our economy in a good condition — after five straight years of growth, including the first half of 2008, a drop in unemployment, and a drop in the national debt,” he continued. “We’ve already proven that this economy deals well with external shocks — for example the economic resiliency during the second Lebanon war.’’
“We are prepared for any eventuality,” Bar-On added, “but I will not elaborate on the possible scenarios and spread panic, as some have been doing.
Moav said the main differences between the Israeli and American banking systems are that there are fewer banks in Israel, thus less competition, and greater government regulation of them dating back to the Israeli banking crisis of the early 1980s.
At the time, Israeli banks had inflated their share prices artificially, and when the stock market crashed, the government came in and nationalized the banks. Reforms that reduced conflicts of interest and mandated the banks part with financial services like insurance and brokerages, helped insulate the banks from the current crisis.
“Before this crisis, we were complaining that the Israeli banking system is not very competitive and as a result the cost of banking services to the Israeli citizen are very high – and the gap between the interest they pay and the interest they charge customers is large,” he said. “Less competition normally is bad for us, but in the current situation less competition and more regulation prevented the banks from taking risks and getting into subprime banking. When you bought a house in the U.S., the down payment could be as little as 10 percent; in Israel, it is 40 percent. This reduces the ability of people to borrow to buy a house, but it also reduces the risk of a crisis.”
Israel’s Bank Hapoalim took the biggest hit on subprime-linked holdings of any Israeli bank, announcing Monday it had $109 million linked to Lehman Brothers Holdings. Bank Leumi reported $88 million similarly linked to Lehman Brothers in such things as bonds and derivatives.
It is too soon to know if the banks will have to write-off all that money. But one thing is certain, there will be “less credit for Israeli businessmen with projects abroad because it’s riskier,” according to Richard Gussow, an analyst at the Tel Aviv branch of Deutsche Bank. “But the banks will definitely be asking more questions before giving loans.”
Of all the Israeli banks, Bank Hapoalim has taken the biggest hit from exposure to the U.S. real estate fiasco, reporting $1 billion in losses that knocked it back from Israel’s largest bank to the second largest behind Bank Leumi.
Peretz of Haaretz pointed out that because Israel does not have its own market for mortgage-backed securities, the effects of the current crisis have been dulled.
“We are are much less sophisticated in financial products,” he said. “There are no mortgage-backed securities. If the Israeli market is simpler, then the influence between one market to the other market is weaker.’’
That said, Israeli households are feeling the chill of the global market down turn because savings instruments like pension and provident funds have invested in companies like Lehman. That assets of the Israeli public dropped 5 percent during August, Peretz said.
“Globalization has helped Israel to improve its economy, but now, we find that the side effect of the globalization.’’