Moody perhaps, but nobody has the blues

Last week, Moody’s downgraded Israeli banks’ outlook from Stable to Negative. For the layman, this kind of news story often proves quite alarming, but in Israel, it’s business as usual. Maybe the prospect of a banking meltdown just pales in comparison to an Iranian nuclear one.

Those of us who were in the UK during the collapse of the financial markets in 2007 and 2008 remember the runs on a succession of banks, with the wonderful image of nice Jewish bubbes sitting in deckchairs outside the Golders Green branch of one such institution, handing out Quality Street whilst waiting to withdraw their life savings.

The depth of the damage done to UK banks may well be ascribed to the vicious downward cycle of the market spooking the public, and the public spooking the market.

Here in Israel, we have become accustomed to a pretty reactive public, with protests about cottage cheese and social justice catching the largest headlines, but any smaller number of demonstrations taking place on an almost daily basis. Yet this news item passed largely unnoticed, because its repercussions are not felt at the end of the month and there was no single vocal interest group affected.

It is something of an irony that the lack of savings among most Israelis leads to a perception, perhaps, that they have little to lose. Elsewhere there are depositor protection schemes in the event of a bank failure. There was in fact one in the UK, with an upper limit of about $50,000 at the time of the Northern Rock collapse (this covered something like 98% of accounts). In fact Israel stands alone in the OECD as not having one, so your average account-holder will be reliant on the goodwill of the Bank of Israel to provide a last-minute insurance of retail deposits.

Of course, Israel has its own chicken-and-egg theme, in terms of the public’s interaction with the small number of massive holding companies whose overwhelming control of the economy is well-reported. It is easy for the average Israeli to be frustrated at this, and to see the daily impact through the lack of competition leading to high prices and restricted supply.

However, the acceleration of Israeli individualism and consumerism, coupled with greater spending power, as the economy transformed in the last generation from socialist to capitalist, has nourished this exact state of affairs. A wonderful article by Ziv Tidhar at the height of last summer’s tent protests pointed out that we created and fed this society of “capitalist pigs”, and he garnered a vocal and conflicted response. Much more can be said about this interesting interplay between the public, the private sector and the government.

Now this downgrade is largely ascribed to the impending double-dip recession across the EU, Israel’s largest export market (yes, despite the fact that “they” apparently hate and boycott us!).

What does this have to do with Modi’in Man or West Rishon Woman’s few thousand shekels down at the nearest Hapoalim or Leumi? These banks all have very high exposure to the rest of the Israeli economy via holdings of corporate bonds in these same conglomerates.

Historically, there was a rather opaque relationship between the banks and the companies they were buying the bonds from, as there was (and is) so much common ownership at the top. Although rules have tightened on this (the Bachar ReformsTrajtenberg Commission etc), there is a legacy of transactions that have yet to be unwound or run their course, and of euphemistic financial skulduggery in the form of “haircuts” (financial restructuring and renegotiation – ie write-down – of corporate debt).

So, if these large holding companies’ profits begin to suffer, so would the value and hence the quality of these bonds. This weakens the banks’ balance sheets and makes them more dependent on their cash assets (ie Modi’in Man’s deposits) to act as security for its loans and investments. This also makes lending more expensive because there is less cash around from those deposits, and an increasingly edgy money market will charge more to extend credit to the banks to loan it onwards.

What does this mean for the consumer? Perhaps West Rishon Woman knows more than Golders Green Bubbe, and does not foresee any substantial Israeli downturn, or knows that Stanley Fischer is likely to intervene if there really were to be an infection of the retail banks from any Eurozone collapse. Certainly the BoI took the Moody’s report in its stride, suggesting that Israeli banks are not really at major risk.

Either way, surely it is a part of reassuring the public that the state is protecting it adequately against the consequences of holding companies’ close control, to now bring in a formal depositor insurance scheme. As we potentially enter a new “camping season” on the appropriately-named Rothschild Boulevard, home to many of Israel’s banks, these are the unfashionable things that Daphni Leef and her cohorts need to start waving banners about.

?העם דורש צדק כלכלי


About the Author
Michael is Executive Director of Asquith Israel Merchant Bank, which seeks to go "Beyond the Start-Up Nation" by investing long-term in Israeli growth companies.