The Bottom Line / Right between the eyes
The sneer most commonly aimed at the Finance Ministry's "young Turks," other than ridicule of their inexperience, is that their decisions are motivated by a hidden agenda: to pander to Israel's business magnates so that these magnates will provide them with lucrative jobs in the private sector after their tenure at the treasury. Factually, the accusation has always been baseless, but it should have received its death blow this week. If you still suspect the "treasury boys" of pandering to business barons, you should read the circular issued by the Finance Ministry's commissioner of capital markets and insurance, Yadin Antebi.
Antebi has a reputation for being a strict commissioner, as does the entire team that supervises the insurance sector under him. They take no prisoners, especially at the insurance companies under their purview. But just as we were growing accustomed to Antebi's iron grip on the insurance companies, this week, he applied it to the market at large. To use a Wild West analogy, this week, sheriff Antebi shot the magnates between the eyes.
He did it by reminding Israeli moguls of their true worth, which is not a lot by world standards. With all due respect to the Strausses, the Dankners, the Tshuvas and the Levievs, the world is populated by thousands more of their ilk, most of whom are richer. And it is time for Israel's moguls to pay the price of doing business according to world standards, not the sweetheart rates they have become accustomed to receiving.
This point should not be underestimated. The big boys have become used to being treated like kings. They are courted by the market and the banks, which are all too willing to lend them money at especially low interest rates. Israel's big businessmen have enjoyed the credit ratings reserved for royalty. Their big companies - which are big only by local standards - receive AA credit ratings, only one notch below the blue-chip rating of the state itself.
Such rates are usually reserved for global giants, several times bigger than Israeli companies. Paradoxically, almost every Israeli contractor has, over the last several years, issued bonds on the Tel Aviv bourse - and received about the same rating as Citibank, one of the world's biggest banks. You do not have to be a capital market expert to realize the absurdity of this situation, an absurdity financed by the Israeli public. Through their provident funds, life insurance policies and pension funds, Israeli savers bought into these piddling contractors at the same prices they could have invested in Citibank.
In other words, Israelis' pension funds effectively subsidized contractors and other Israeli business barons by buying bonds at rates several times higher than what their peers would cost abroad. But now, Antebi is putting an end to all that. His new directive demands that Israeli credit ratings, which are inflated upward, be commensurate with world credit ratings.
It is clear as day that his directive will precipitate an across-the-board plunge in the credit ratings of Israeli companies. Some think that these firms' credit ratings on the stock exchange will drop, at best, to a rating of between B and BB.
Aside from the banks, no Israeli firm will be given an A rating, meaning their bonds will no longer be considered worthy of investment by pension funds (a ranking below A is considered undesirable by large institutionals.) The interest rates that these companies will be expected to pay will increase accordingly.
Assuming the reform comes off, Antebi and his team will complete a process begun by Moshe Nissim, who was finance minister exactly 20 years ago: Once and for all, they will open the Israeli market to the world. First, Israeli industries were exposed to competition by the removal of protective tariffs. Now, all Israeli companies will be exposed to competition by the removal of their financial protective tariffs - namely, their distorted credit ratings.
Israel's market will turn global in the full sense of the word. And the beneficiaries of this move will be all Israelis with pension funds, who will finally receive fair prices for the risks they run. The era in which pension funds invested in Israeli companies at inflated prices is over. Investors' shekels will be equally matched against the dollar, and both will enjoy equal conditions in a free and competitive global market.
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