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Stock Market Plunge Triggers Mass Selling of Israeli Shares

A frantic selling spree and a bomb scare shook the Tel Aviv Stock Exchange Tuesday as fearful investors reacted to Monday’s crash of the New York stock market.

It was probably the most tumultuous day in the history of the Tel Aviv bourse and could not have come at a worse time for the country’s financial markets and the economy as a whole.

Tuesday was the last day that holders of government-backed Israel bank shares had to decide whether to redeem them or hold out for a higher return payable in 1989. Treasury officials had estimated Monday that about $700 million worth of bank shares would be cashed by the public and, hopefully, re-invested in other shares or in saving plans.

But the news from Wall Street and its reverberations in financial markets around the world apparently triggered a mass dumping of all securities, an event the Finance Ministry and the Bank of Israel had hoped to avoid.

Many bank-share holders who had indicated only a day ago that they would hold on, decided Tuesday to sell out and buy durable or consumer goods. This, economists fear, will set off a new round of runaway inflation, with devastating effects on the government’s long and generally successful efforts to hold the line against inflationary trends. An estimated $1.2 billion worth of bank shares could be cashed in by the end of the month.

SHAREHOLDERS OPTED OUT

By noon Tuesday, the banks reported that 50 percent of their shareholders had opted to sell out for cash.

The present situation stems from the wave of panic selling in October 1983 when holders of bank shares — a major form of savings in Israel — converted to cash following reports that the country’s largest banks had been systematically inflating the value of their shares to keep prices up.

The Treasury intervened to bail out the banks — most of whose directors were forced to resign — and offered shareholders incentives not to sell. The Finance Ministry promised that every $100 worth of shares they held in 1983 would be redeemed at the shekel equivalent of $112, payable Oct. 28, 1987. Oct. 20 was the deadline to decide.

Investors who agreed to hold their shares for another two years would receive the shekel equivalent of $134 per $100, payable in 1989. The shares, however, would be negotiable at current prices, starting Nov. 1, 1987.

But all bets seemed to be off when the bottom dropped out of the New York market Monday. The Dow Jones average declined by 508 points, its worst fall in history, raising the spectre of a worldwide depression such as was triggered by the stock market crash of October 1929.

At one point Tuesday morning, trading was halted temporarily on the Tel Aviv board. The exchange managers said the reason was technical, to allow their computers to catch up with the frantic trading.

But before this occurred, an investor, not identified, telephoned to say he would blow up the stock exchange unless trading was stopped. The bomb squad was called in, but no explosives were found.

Most shares were registered as “sellers only,” which means under exchange rules that they will be automatically marked down by 5 percent when the exchange opens Wednesday.

Yossi Nitzani, director of the Tel Aviv exchange, told reporters later than there was no logical connection between the rush to sell in Israel and the precipitous drop on Wall Street because the Israeli economy is in good condition.

Nevertheless, Israel’s economy is tied to the United States. Defense Minister Yitzhak Rabin said Tuesday that events there could affect U.S. military aid to Israel.

“I was among those who believed we faced uncertainties from the economic situation in the U.S.,” Rabin said, referring apparently to the serious American budgetary and trade deficits. He said that was one reason he favored abandoning the Lavi jet fighterplane project which was financed by American military grants.

“I hope the U.S. will overcome its economic difficulties, and especially that they will not have any effect on American foreign policy, in which foreign economic aid is one of the major components,” Rabin said. He added that he hoped American efforts to balance their budget would not be at the expense of foreign aid.

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