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"If the cabinet and the Bank of Israel do not deal with the exchange rate problem, it will be very bad here. The strong shekel, compared to the dollar and euro, is a strategic threat to the [Israeli] economy. It is simply awful. Many companies and industries are in real danger," senior banking executives told TheMarker yesterday.

According to the bank officials, firms that sold their products a year ago at an exchange rate of NIS 4.5 to the dollar cannot continue to operate at an exchange rate of NIS 3.3 per dollar.

"No one has such high profit margins of over 30%. The firms are eating up their equity and the stage will come when they can no longer withstand the economic pressures and they will collapse," said the bankers.

The executives said they have identified a particularly critical situation in the kibbutz industries, since they have entire factories based on Israeli labor and export all their products - in other words, their expenses are almost entirely in shekels while their revenues are almost all in dollars.

The bankers seemed to have proved their point when ratings agency Standard and Poor's Maalot lowered the rating of all the deferred notes of Israeli banks by one level yesterday.

These deferred notes are similar to bonds issued by the banks, but are considered inferior to bonds as they have a lower priority if the bank defaults and are usually rated one step lower than a bank's bonds. Therefore, the notes are also considered differently in calculating the banks' capital.

Today, Israeli banks must have a minimum capital ratio of 9%, but the Bank of Israel's Supervisor of Banks, Rony Hizkiyahu, has made it clear that he wants to raise this amount to at least 12%.

In response, the banks have been raising billions of shekels since the beginning of the year, and the fundraising is expected to continue in the second half of 2008 too, as well as into 2009.

As a result of the lower ratings, the banks are expected to have to pay higher interest rates on the funds they raise.