Near Panic Dominates Israel’s Money Market
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Near Panic Dominates Israel’s Money Market

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Near panic dominated Israel’s money market today as public confusion mounted over the government’s seemingly contradictory policy toward the Shekel.

The Treasury had been promising for the past week that there would be no sharp, sudden devaluation of Israel’s currency. The commercial banks unexpectedly announced today that the Shekel will sell at the rate of 70-99 to the U.S. Dollar, down from the 65.63 rate that prevailed last Friday. Two hours later, the Bank of Israel, the country’s central bank, announced an official base rate of 69.27 Shekels to the Dollar.

Speculators who had disregarded the Finance Ministry’s promise to maintain the Shekel and purchased Dollars, earned a profit of over five percent. Those who trusted Finance Minister Yoram Aridor’s assurances that devaluation would be gradual, registered losses of between 15-30 percent.

The government sought to maintain the Shekel at last week’s rate to stem the public rush to buy foreign currency, mainly Dollars, before they became too expensive. Upwards of $60 million worth of foreign currency was bought by the public in a three day period last week.

The atmosphere of panic was engendered by the suspension of foreign currency transactions. The Tel Aviv stock exchange was closed yesterday and is expected to remain closed for several days. The buying and selling of Israel commercial bank shares was suspended, probably for the rest of the week.

The local money market suffered a severe shock over the weekend when the commercial banks and the government agreed in principle on measures to stabilize bank stock. Until recently, bank shares were considered to be the safest investment, preferable even to index-linked government bonds. But that changed in recent weeks as the shares showed a downward trend.

The public began selling off their bank shares to buy foreign currency. The banks, anxious to avoid the collapse of their stocks, invested some 10 billion Shekels to shore up their value. This worked as long as there was no excessive demand for cash. But the run on foreign currency precipitated a crisis.


Late last week, the heads of the commercial banks met with officials of the Treasury and the Bank of Israel. Agreement was reached to link bank shares to the U.S. Dollar, in effect a government guarantee of their value. Shareholders would be required to retain them for a specified period, probably five years.

The agreement is still subject to approval by the Cabinet and the Knesset Finance Committee. Israel’s largest commercial bank, the Bank Leumi, was reportedly unhappy with the new arrangement. Opposition spokesmen and others demanded yesterday that the new agreement be incorporated into law.


One of the effects of the drop in bank share prices may be a spate of bankruptcies of firms which obtained credit from the banks, using their shares as collateral. The banks are likely to decide that the value of the collateral is insufficient to guarantee the credit and may demand additional security which some clients may not be able to provide.

The Labor Party issued a statement yesterday claiming that the public is now being forced to pay the price of its trust in the economic policies of Finance Minister Yoram Aridor and the Likud government.

Histadrut warned that it will fight hard against any attempt by the government to reduce cost-of-living allowances which are presently pegged to a three month increase equivalent to 80 percent of the cost-of-living index during the previous quarter.

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