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For five years Israelis took gleeful advantage of their newfound freedom to invest overseas. But this year, as the financial crisis shaking world markets takes its toll of stocks worldwide, they're keeping their money at home. Fresh figures regarding the first quarter of 2008 show a steep fall in overseas investments, fueled in part by fear of a recession in the West.

The private sector's investments overseas (not including by the banks), which include provident funds and insurance companies, sank to just $372 million in the first three months of the year. That figure is equivalent to just 2.1% of the private sector's $17.9 billion in overseas investments during the whole of 2007. The figure is even more pathetic when compared with the year 2006, when the private sector invested $25.3 billion outside the country.

The reason is prosaic enough: unsatisfactory returns on investments, not to mention outright losses, and the loss of confidence that a turnaround is imminent.

The trouble started with the subprime crisis in the U.S., caused by too many banks lending too much money to homebuyers too impoverished to service their loans. The banking system repackaged too much of the debt into derivatives, which were poorly understood by the markets and which involved more risk than, evidently, many investors understood. Too many financial institutions and investment banks gorged on the derivatives, resulting in enormous losses. Israel's Bank Hapoalim alone has evidently lost about a billion dollars on American credit-based adventures and giants such as Citi and UBS found themselves scrambling for cash to shore up their equity base. Some pundits think the worst is over, but not all.

Meanwhile, Israelis are investing less overseas and are repatriating some of their money, too, which is weakening the dollar locally even more as they convert their assets into shekels.

Total investments by all Israelis outside Israel totaled $1.7 billion, or, less than 11% of total Israeli investment outside Israel in 2006. The figure that year had been $16.6 billion.

The Bank of Israel's monthly report on foreign-exchange activity, this time for March, shows changes in household patterns, too. Last month households withdrew $193 million from their foreign currency-deposits in Israeli and foreign banks, which was a reversal of pattern if not necessarily of trend: throughout the previous year they'd been depositing foreign currency at the banks, in net terms. Also in March, households continued another trend, of withdrawing their money from mutual funds specializing in foreign currency.

While on the topic of the Bank of Israel's foreign currency review, it also reported that during March, the shekel appreciated by 2.3% against the U.S. dollar, and weakened by 1.6% against the euro.

Meanwhile, nonresidents have been scaling back their investments in Israel, according to Bank of Israel figures. Total investment by foreign residents in Israeli assets during the first quarter of 2008 was $3.2 billion, which falls below the monthly average last year. The central bank noted that they continued to invest in bonds and shares - and derivatives - on the Tel Aviv Stock Exchange.

Nonresidents scaled back their foreign direct investment in Israeli assets by about $261 million last month, the central bank wrote. But that's a relative slowdown. In recent months, nonresidents had been withdrawing foreign direct investments at a pace of about $500 million a month.