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Last update - 00:02 11/10/2008
Israel on standby as global financial rescue takes shape
By TheMarker Staff
Tags: Israel News, Global Markets 

In a dramatic, unprecedented move designed to stop the snowballing financial crisis, six developed nations Thursday cut interest rates by half a percent.

Israel had cut rates too, but a day earlier because of the Yom Kippur fast.

Israeli economic leaders remain tensely on watch as the debate rages over the merit of the coordinated move; the Bank of Israel's Supervisor of Banks, Rony Hizkiyahu, says that while he's keenly watching developments, intervention here would be premature.
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Meanwhile, the International Monetary Fund Thursday announced an emergency lending mechanism as the world tips toward recession, and Britain partially nationalized its banks. Even America, the bastion of capitalism, is whispering about a similar move.

Are the local banks in danger?

Meanwhile, banks around the world are shoring up their equity. Bellwether
institute Bank of America raised $10 billion by selling shares this week and Israel's banks might have to consider similar steps. Watchdog Hizkiyahu said he doesn't intervene in banks' dividend policies, but if he learns that the banks' capital adequacy ratios are about to drop, he will intervene and demand they improve their equity too.

Israel's banking system is small, the banks know their customers intimately, and the Bank of Israel knows them all. The local system doesn't suffer from the opacity and the uncertainties of the global system.

Yet two things could scuttle the local banking boat: a run on the banks by a frightened public, or the collapse of major borrowers  companies belonging to the likes of Lev Leviev, Yitzhak Tshuva, or Eliezer Fishman.

Neither scenario looks likely, but neither looks impossible either, given the events of recent weeks. If Jerusalem follows the trend in the west, it will nationalize the banks (again). Depositors won't suffer, but
the owners of the banks surely will.

Markets wilt

Yet none of the moves helped rally world stock markets. A late selloff sent the Dow Jones plunging more than 660 points to end 7.2% lower, at 8,586 points, and the Standard & Poor's 500 index fell 7.6% as fear gripped Wall Street. General Motors led the Dow lower with a 30% crash following news that it's on credit watch, and oil hit a 12-month low, falling below $85 Thursday.

The 0.5% rate cut to 1.5% by the U.S. Federal Reserve on Wednesday did nothing to shore up the market, it seems. The European Central Bank also lowered interest to 3.75%. Japan's rate was already only 0.5%, and a Bank of Japan official said Wednesday that they saw no need to cut it any more.

Here, analysts had been stunned by the Bank of Israel's rate cut Monday, three weeks ahead of the next scheduled monetary meeting. Now they're thinking that the Bank of Israel may cut the rate again soon to stimulate the economy.

If money is cheaper, banks can free up their lending to one another and to companies, too. Without credit, the business sector will seize up. Companies will go broke and then banks will fall too, as loans aren't returned.

Some analysts fear that a half-percent cut isn't enough to ease banks' concern about not getting their money back as the global economy judders. Hence the expectations of more interest cuts to come.

In its announcement Monday, the Bank of Israel wrote that Israel's banking system is strong and added that it was prepared help the banks with all the tools at its disposal.

But Israel's leaders have to consider more significant steps. For example, London part-nationalized England's eight biggest banks this week.

Friday the world's finance ministers and central banks from 120 countries meet in Washington, for the annual conference of the International Monetary Fund. The conference agenda is usually set months in advance  poverty, Africa. No change has been announced yet, but there are more burning things on the agenda.

On Thursday IMF Managing Director Dominique Strauss-Kahn called for a global effort to stem the spiraling trouble, noting that individual efforts by countries were useless.

Even giants like China and Brazil can't expect not to be affected, though both will sustain economic growth, he qualified.

"It would be very surprising if a power like China would just be looking at the crisis from a balcony without being very concerned," Strauss-Kahn told a press conference Thursday.

The bright side? The IMF forecasts global recovery should begin near the end of 2009, Strauss-Kahn said.

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