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Psssssssssssh ...

Can you hear that hiss? Or is it our imagination that the air is escaping from that "turnaround" bubble that we've been busily blowing up in the last few months?

Recap: From the start of February, the shekel has strengthened by 10 percent, stocks have soared by 40 percent, although they've slid some in the last month. Interest on government bonds has dropped by 4 percent and trading volumes on the Tel Aviv Stock Exchange reached heights not seen in since the last millennium. Major shareholders began divesting large chunks of stock and mutual fund managers explained that the stock market had simply discerned the upturn before anyone else.

But in the last few days, market animals are starting to feel like those cartoon coyotes that continue madly pumping their legs after racing over the edge of the cliff, only to look down, realize their situation and drop like stones.

Let's not get carried away. We aren't hanging in thin air over an abyss. Economic activity has clearly stabilized after eight quarters of decline. Retailers are reporting a substantial upswing in business.

There is no doubt that America's involvement in the Middle East - Iraq, the loan guarantees, the road map - has reduced the risk associated with Israel. Hence there is some logic to the rise in share prices and the drop in the cost of capital.

Bon appetit

But to call it a turnaround is to go too far. Suddenly it transpires that the only parameter to have truly changed is the stock market itself. But it is fueled mainly by expectations. And the more time passes, the more question marks arise about the real chances of an upturn in the marketplace.

The first to understand that the air is escaping rapidly was, of course, the finance minister, Benjamin Netanyahu. After two months of aggressively marketing the achievements of his economic program, he began to change his tune. Yesterday he returned to the strategy he used at the start of his stint - scare tactics.

Some three or four months after discovering the true dimensions of Israel's budget disaster in 2003, Netanyahu finally admitted that the government's deficit could exceed 6 percent of GDP this year. That is the highest deficit the government has run in a decade.

Why admit it now? Because this is no time to boast of achievements. The circumstances require him to remind the public how long a row it has yet to hoe. And how deep the hole in the public coffers really is.

If the truce with the Palestinians fails to restore private consumption and investment, which would improve the economic situation, the pressure on the finance minister and treasury will grow enormously.

The first signs of stress are already evident, in those frantic announcements about plans to privatize the two big banks remaining in state hands, Leumi and Discount. While the concept may demonstrate determination and direction, their privatization would not help the economy, the capital market or the banking establishment one whit. At best, the sale would bring the state kitty a few hundred million dollars, which the towering deficit would swallow up in a flash.

Distraction tactics

The banking sector's biggest problem today is a credit crunch. If Netanyahu wants to help the banks, then maybe he should suggest that income from stock offerings of sale of shares should go to the banks themselves, to expand their capital base. In other words, privatization should be carried out through allocation of new shares, not selling the state's stakes.

The main goal in privatizing the banks should be to expand their capital base, transfer control and management to new, private hands, and split off the mutual funds and provident funds.

But all these are tough-love measures, to which the banks strenuously object. From their narrow perspective, they'd prefer the Netanyahu's current plan, which would help the accountant-general finance the deficit while perpetuating the reign of their current managements.

The treasury's obsessing over privatizing the banks does not necessarily transmit a message of strength and direction. It could also indicate its reluctance to tackle the only really crucial thing on the agenda today, which is the budget for 2004, and the enormous cuts needed in it - the biggest ever carried out in Israeli history.

Summer has arrived, the holidays are around the corner. The treasury would do well not to waste time.

Correction

Nestle acquired control over Osem Food Industries (TASE: OSEM) according to a company value of $400 million, not as written in the Hebrew version of this column yesterday. Therefore, the company's value, including dividends, has multiplied since then by 2.5.