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Prime Minister Confronts Widespread Market Fears

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After vowing during last week’s trip to the United States that he would revitalize Israel’s economy, Prime Minister Benjamin Netanyahu summoned the governor of the Bank of Israel for urgent consultations about a growing crisis in the nation’s stock and capital markets.

Monday’s meeting between Netanyahu and central bank Gov. Jacob Frenkel took place as share prices on the Tel Aviv Stock Market plunged by more than 3 percent for the day.

Investor fears about the future course of the peace process and regional stability have prompted the market to lose more than 10 percent of its value since Netanyahu’s victory in the May 29 national elections.

In addition, a record level of Israelis cashing in their low-interest provident funds have forced banks to begin reconsidering their mortgage policies.

The provident funds were created to enable employees and employers to make long-term deposits in non-taxable savings plans.

The money is invested primarily in savings bonds that were originally assured competitive interest rates by the government.

But since the decision of the government several years ago to stop guaranteeing the interest rates, the funds have earned relatively low rates.

Israelis have instead opted to cash in the plans and invest in bonds, which are offering the highest yields in 10 years, or in short-term savings plans.

Israelis have reportedly liquidated some $1.4 billion from the provident funds during the first six months of the year.

The liquidations have had serious repercussions on Israel’s banks, which use the provident funds to capitalize mortgages they issue.

The rush to liquidate the funds has forced the banks to reduce the number of mortgages they grant and may also lead to increases in their lending rates.

Further upward pressure on interest rates came with Monday’s release of the June figures for the cost-of-living index, which rose 0.7 percent for the month.

The main factor in the rise was a continuing increase in housing costs. The rise was offset somewhat by a drop in fruit and vegetable prices.

The rate of inflation for the first half of the year now stands at 7 percent, and the projected rate of inflation for the year may rise into the double digits.

Rising interest rates as a result of inflationary pressures could in turn have further adverse effects on the stock market and on rates for housing and other loans.

Netanyahu attempted to quell investor fears this week by saying that the markets would eventually reflect the positive effects of his plans for privatization and government spending cuts.

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