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"It all depends on one man.

"All this recent euphoria in the markets is founded on Ariel Sharon. If heaven forbid anything happens to him, the dollar will soar, the stock market will fall and foreign investors will be the first to flee the stock market and the shekel.

"Israel's markets are in the grip of a kind of cosmic euphoria. It is nice and I hope it will continue, but there is one key danger that everybody prefers to ignore. Never in 50 years, since the days of Ben Gurion, has Israel's entire economic and political been in the hands of one man, Ariel Sharon - a man neither young nor healthy, 78 years old, whose aides sometimes have to help him get up from his chair.

"I naturally wish the prime minister a long life, but to protect himself, I counsel every investor on the stock exchange to sell some his shekel bonds portfolio and to hold at least 25% in dollars, to hedge his stock market investments against the worst-case scenario. Investors have no other hedging alternative today, because interest on the dollar is almost identical to interest on the shekel." ("It all depends on one man", Adam Reuter, TheMarker, December 13, 2005.)

When Reuter, an economist, wrote that for TheMarker three weeks ago today, some accused him of trying to drum up a headline through the bizarre mechanism of looking at the economy, share prices and the markets through the prism of the prime minister's health.

Yesterday Reuter's simple, down-to-earth logic didn't seem bizarre at all, when the company took a painful blow and uncertainty in the business sector spiked overnight.

The end of an era in Israeli politics brings clear threats: the probability of creating a stable, strong coalition has dropped; the ability of other leaders to continue taking Israel out of the territories remains unclear; hierarchy squabbles in Kadima will extend the uncertainty; investors in Israel and mainly abroad may decide to sit on the fence and wait until the political picture clears up.

The list could go on and on but the message is clear: Sharon's departure creates an entirely new political situation. Reaching a new balance may take a long time. The markets like certainty, they like the story to be clear, which is something the political echelon can't provide now.

But after the dust settles, we will remain with Israel's economic and political fundamentals, which have been around a long time and probably won't change:

* In recent years the State of Israel chose to become part of the global economy. It is completely open to the entry and exit of money. That policy cannot be rolled back, so any government will have to adhere to much the same economic tenets as the rest of the world. Some governments will embrace them warmly, others with reluctance, but nobody can ignore them.

* A year ago the State of Israel chose Stanley Fischer, an American, governor for the Bank of Israel. He has consistently been part of the "Washington consensus", a set of basic economic rules that most of the West follows. It is hard to see any major deviation from that consensus, as Stanley Fischer is also the economic adviser to the government, and foreign investors know it.

* Ariel Sharon led the process of disengagement, but the main engine driving it was the American government. The interests of the American government in the Middle East are clear and Washington's dominance over Israel's diplomatic moves remains unchanged. Israel's diplomatic direction is not up to Jerusalem.

* Four months ago Prime Minister Ariel Sharon received an order from Washington, to fire the director-general of the Defense Ministry, after the ministry disobeyed a U.S. order about arms sales to China. That minor event demonstrates Washington's control over Israel and its policy.

* Israel's economic rally began in the first quarter of 2003. It can be related to Sharon's political steps and Netanyahu's economic moves, but we cannot ignore the fact that America invaded Iraq at about that time, and granted Israel $10 billion worth of loan guarantees. That safety net of the guarantees still underlies Israel's economy and enabled the government to dramatically improve its financial profile.

The steep descent of shares and bonds on Thursday was a raucous wake-up call to all the players who had succumbed to the euphoria in recent months. The drop reminded investors, bankers and consumers too of the political risks to Israel's economy - but local politics is far from being the main risk in the markets, in this era of being open to the world.