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The credit crunch is the main economic problem facing Israel during the present global financial crisis, the Finance Ministry and the Bank of Israel agree.

The biggest risk to the economy is still the possibility of a public panic that would lead to a stampede of withdrawals from both banks and provident funds. A run on the banks would destabilize them and take the entire financial system along with them, but the central bank and treasury believe the likelihood of such a panic is small. In their opinion there is a much greater danger, and likelihood, of damage to the economy as the result of a serious credit shortage.

In recent weeks the treasury and the Bank of Israel have been busy preparing emergency measures that could be taken in the event of a public panic. That is why the governor of the Bank of Israel, Stanley Fischer, and Finance Minister Roni Bar-On have time after time repeated that the state is fully committed to protecting the public's savings. In effect they have de facto announced an Israeli deposit insurance program, even though legally no such thing exists.

The bank and the ministry now think they have succeeded in calming the public and averting mass bank withdrawals.

As to the fears of panicked withdrawals from provident funds, neither body has yet to take any concrete action but they are considering a number of plans. The two leading alternatives are a safety net for pension savings, in other words a guaranteed minimum return on pension savings; or intervention to prevent bond prices from falling further by buying such bonds in the market.

The central bank and the treasury seem to be leaning toward the option: finding a way to stop the fall in bond prices, which would stem the losses of the provident funds. Officials are now studying the technical aspects of such a step. The most likely scenario is providing incentives to institutional investors to buy up such bonds in the markets. The plan would only be implemented if there are large panic sales and buyers are afraid to act.

The two bodies would prefer to act directly on markets to prevent the collapse of corporate bonds, and thus save the provident and pension funds, rather than guaranteeing returns for pension savings.

The reason for this is that the central bank and the treasury believe that guaranteeing returns would be much more costly than supporting bonds. No price tag has yet been put on either option, but it is possible to quantify the costs of the incentives to institutional investors to buy up bonds.

In any case, all of the various plans are on file in case they are needed quickly. For now officials feel that will not be necessary.

The plans that both institutions think may get some exercise are the ones to fight a possible credit crunch, where credit is unavailable to those who need it, when they need it. And the Bank of Israel and the Finance Ministry believe that day may very well come, since even after the preliminary market panic recedes the credit shortage will continue.

The main way to remove the credit bottleneck is through expansionary monetary policies. These include, among other measures, reducing interest rates and increasing the borrowing limits the Bank of Israel issues to commercial banks.

It seems all these possibilities are now under consideration, as well as direct budgetary aid, such as by providing loans from state funds.

The main problem with the credit supply alternatives is the cost. It would mean increasing the state budget, and therefore the deficit.

This would come at the same time that the 2009 state budget is already expected to exceed its target due to the steep drop in tax revenues that has alreadt started.

Any additional spending increases would thus be problematic, and it is not clear how such a deficit would be funded.

Increasing state borrowing by issuing even more government bonds would only make the credit crisis worse, as the state would soak up more of the limited credit available in the markets and compete with private companies for funds.