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News Analysis: Decline of Israeli Stock Market Poses Headache for Government

February 28, 1995
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With world money markets reeling in the wake of the collapse of Britain’s Barings investment bank, the problems on Israel’s stock exchange seem like small potatoes.

But for the government of Prime Minister Yitzhak Rabin, troubled by waning support for its peace policy, the steep and ongoing decline in Israeli share prices is posing a major headache.

By midweek, Israel’s leading stock-price index, called the Mishtanim in Hebrew, stood at 146 points, about the same level it was at three years ago.

The same index topped 230 points just 10 months ago.

The drop has affected not only share prices, but has also spilled over into the country’s provident funds and savings funds, eroding the savings of hundreds of thousands of ordinary people who do not play the market and believed that their nest eggs were safe.

The provident funds, known in Israel as Kupat Gemel, represent the investments of Israeli workers, with matching investments often provided by their employers, in bonds and other financial instruments. Unlike Americans investing in pension funds, Israelis are able to withdraw from the provident funds prior to reaching retirement age.

After a lengthy Cabinet meeting Sunday, the government issued a strong statement of support for its own bonds, which form the bulk of the assets of the major provident funds.

The Cabinet statement, coupled with intervention by the Bank of Israel, arrested the downward drift of bond prices Monday and Tuesday.

Nonetheless, thousands of small investors are believed to have sold their holdings in these funds, with many planning similar moves in the days ahead.

Market analysts predict that if this market continues, bond prices will continue to tumble.

The major provident funds hold only 10 percent of their assets in stock shares. The rest are in bonds, and are therefore cushioned against all but the sharpest drops in the market.

But the latter part of 1994 saw such a drop, with some prices down by as much as 50 percent.

As a result, these funds — which had been earning an average of more than 4 percent in recent years — showed losses of more than 8 percent in 1994, causing widespread dismay.

The near-panic atmosphere currently prevailing on the Tel Aviv Stock Exchange triggered renewed calls for Finance Minister Avraham Shohat to resign.

Shohat, who was criticized for the recent fiasco surrounding a controversial capital-gains tax that was revoked just before going into effect, spent the week insisting that he has no intention of resigning because of the stock markets.

Likud leaders claimed in the Knesset on Monday that Shohat was dragging the economy into ruin.

But appearing on a television talk show later the same evening, Shohat maintained that the economy is strong.

With the country’s gross national product at $65 billion and the economy enjoying a steady growth rate, Israeli citizens ought to be enjoying a sense of national and individual prosperity, analysts say.

And indeed, many of them are. Weekend holidays in European cities are now no longer the province of the fortunate few, but a common way for middle-class professionals to spend their leisure time.

However, the boom has not meant prosperity for all.

In fact, the social gaps in Israeli society, according to experts and to official statistics, are wider than ever.

Disparities in earnings and in living standards, discernible in every major city today, make it difficult to believe that Israeli society was noted for its egalitarianism just a generation ago.

Now, even those directly benefiting from the economic boom have been shaken by the downward plunge of the stock exchange.

This loss of confidence makes it all the more difficult for the government, determined to adhere to its 10-year plan to privatize government-owned industries, to dispose of its assets at good prices.

In the political arena, this lack of confidence translates ominously into a shift in voter attitudes — a point keenly felt by Rabin himself.

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