Eyes Wide Open: The Irresistible Ease Of Raising Money In Israel Is Now Over

Profession:Gornitzky & Co
 
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Article By Adv. Itay Geffen, Gornitzky & Co. (Israel)

The irresistible ease of raising money from institutional

investors in Israel (similar to QUIBS in the US), by issuing

unsecured bonds with a very low interest rate, has generated a

massive level of debt and a long list of Israeli firms that cannot

make repayments.

The worldwide crisis has caused an historic, hysteric,

domino-like downfall in the once assured bonds market, and forced

many institutional investors to disclose their severe losses to

savers.

Excessive leverage has been the key characteristic of

today's turmoil. There were clear gaps in regulatory and

accounting standards regarding the treatment of 'off-balance

sheet' financial vehicles in Israel, as well as lending

practices.

The Israeli rating agencies played a key role in the

securitisation process. They did not have sufficient information or

experience to assess the risk-return profiles of the now well known

investment vehicles, when assigning prime and triple-A ratings.

This paved the way for the boom in a range of structured products,

such as collateralised debt obligations and asset-backed commercial

paper.

The prevailing attitude 'the market always knows best'

proved to be wrong both in Israel and abroad. The failure of the

Israeli authorities to regulate and to stop the irresponsible

lending practices fuelled the bond market and led to the current

crisis.

Israel has taken steps to minimise future turmoil. The first act

of defence is to cut interest rates to help bank margins and

earnings. The governor of the Bank of Israel caught the market by

surprise by cutting half a percent from the rate, only two weeks

after shaving off 0.75 percent. The Bank of Israel will follow the

trends of central banks around the world and maintain an interest

rate policy that supports growth and employment, along with

financial stability, without hurting the downward trend in

inflation.

The Israeli Ministry of Finance is set to cushion the Israeli

economy from the shocks of the international credit...

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