Prof. Stanley Fischer is troubled. Over what? During the past two weeks the Bank of Israel governor has been saying again and again, in different forums, that he's concerned over the state of Israel's capital market and financial system.
He started early last week, in a conference at the Hebrew University of Jerusalem's School of Business Administration. There, Fischer compared the concentrated structure of the Israeli economy - where a regime of corporate pyramids reigns supreme- to Colombia.
He continued his campaign of asserting harsh criticism at a meeting of the Knesset's Finance Committee. There he again warned about the danger posed to investors by pyramidal structures.
Later, at a conference in Ashkelon and in television interviews the past few days he has gone on to say he's disturbed by the wave of haircuts from business barons, and warned against investing in their bonds. They have become accustomed to repaying when they find it convenient, which isn't how things should be, the governor elaborated.
Fischer is right: There is reason to worry.
It could be assumed that the warnings he is sounding do not just stem from the crumbling bonds of several of the Israeli economy's largest borrowers, but also from what is happening in the U.S. and European capital markets. Fischer sees how the Western world's financial systems have been serially collapsing and resuscitated by the central banks in recent years: This happened in the U.S. in 2008 and is now repeating itself in Europe.
Fischer's latest statements home in on an issue on the public agenda: The trend among controlling owners of some of the economy's largest holding companies to default on principal and interest payments for loans taken from the public through pension funds and insurance companies. His top concern, though, is Israel's banking system: He is charged with the system's stability.
A clear and present threat to the banks
Although he refrained from saying as much, the overleveraged pyramids and loan-laden tycoons threaten not only the public's retirement savings but also the banks' balance sheets.
Together, Israel's biggest business concerns owe the banking system more than NIS 100 billion. That is more than the combined equity of all the banks put together.
The banks may have better security to back credit extended to big business, but their loss absorption capacity is much smaller. Pension and provident fund losses are spread among hundreds of thousands of retirement savers, but losses by banks could threaten their stability and raise red flags for depositors.
When it forced the banks to sell their holdings in provident and mutual fund management companies six years ago, the Bachar Committee eliminated much of the risk to the stability of the banking and financial systems. If the banks had continued controlling these funds their balance sheets would be much more vulnerable to the loans made to tycoons, not to mention to the exodus of the public's money.
Although the Bachar reforms were only partially implemented and the capital market was left shot thruogh with deformities, the measures that were adopted probably saved the banks from collapsing.
It isn't the public's fault
Asked about the public's pension savings this week, Fischer said anyone not interested in assuming risk should invest in nothing but government bonds. He recalled an idea making the rounds at the Finance Ministry: that retirement savings for anyone over the age of 50 should be invested solely in government bonds.
This isn't an answer that should satisfy the Israeli saver.
First of all, it wasn't the public that chose to invest in bonds issued by high-rolling tycoons. It was the managers of the public's money: the institutional investors, members of an exclusive club where they mostly look after themselves and their friends.
The current structure of the capital market doesn't provide them with any real incentive to protect the money of the saving public.
Secondly, anyone choosing to invest only in government bonds at the low interest rates currently prevailing in the markets could find himself with a shrunken pension. To attain high returns over time, risks must be taken - investing in stocks, corporate bonds or alternative channels.
Thirdly, the public hasn't any simple means for investing its pension money solely in government bonds at low management fees. The government should think anew about creating such devices, either directly or through the private financial sector.
The role of government is to create a fair and efficient capital market structure - a structure accelerating economic expansion, allocating capital efficiently and enabling the saving public to reap a reward from risk taking in investment portfolios. At present the market seems structured mainly to serve its insiders.
The role of the central bank governor is advising the government how to create this type of capital market structure. There is nobody more sophisticated, sharp, informed and independent than Fischer to perform this mission. Finance Minister Yuval Steinitz and capital markets commissioner Oded Sarig have long exhibited their apathy on the subject.
In recent months the public belatedly discovered the imminent danger menacing its pension savings as a result of the concentration and conflicting interests in the capital market.
But the picture seen by the public still remains much rosier than reality warrants. Falling interest rates over the past few years generated capital gains in pension portfolios and offset some of the losses from sour stock and corporate bond investments. At the microscopic interest rates currently prevailing in the markets, generating profits and returns for investors will be much more challenging in the coming years.
If the government and regulators don't act quickly to rebuild the capital market from scratch, the next social protest could be by retirees and retirement savers - having lost faith in the capital market and demanding to know where their money went.
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