Article By Adv. Itay Geffen, Gornitzky & Co. (Israel)The irresistible ease of raising money from institutionalinvestors in Israel (similar to QUIBS in the US), by issuingunsecured bonds with a very low interest rate, has generated amassive level of debt and a long list of Israeli firms that cannotmake repayments. The worldwide crisis has caused an historic, hysteric,domino-like downfall in the once assured bonds market, and forcedmany institutional investors to disclose their severe losses tosavers. Excessive leverage has been the key characteristic oftoday's turmoil. There were clear gaps in regulatory andaccounting standards regarding the treatment of 'off-balancesheet' financial vehicles in Israel, as well as lendingpractices. The Israeli rating agencies played a key role in thesecuritisation process. They did not have sufficient information orexperience to assess the risk-return profiles of the now well knowninvestment 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 commercialpaper. The prevailing attitude 'the market always knows best'proved to be wrong both in Israel and abroad. The failure of theIsraeli authorities to regulate and to stop the irresponsiblelending practices fuelled the bond market and led to the currentcrisis. Israel has taken steps to minimise future turmoil. The first actof defence is to cut interest rates to help bank margins andearnings. The governor of the Bank of Israel caught the market bysurprise by cutting half a percent from the rate, only two weeksafter shaving off 0.75 percent. The Bank of Israel will follow thetrends of central banks around the world and maintain an interestrate policy that supports growth and employment, along withfinancial stability, without hurting the downward trend ininflation. The Israeli Ministry of Finance is set to cushion the Israelieconomy from the shocks of the international credit...
Eyes Wide Open: The Irresistible Ease Of Raising Money In Israel Is Now Over
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