Global Panic Hits Tel Aviv as Investors Switch to Bank Accounts

From Tuesday, the Israeli public has withdrawn NIS 4.9 billion from savings funds.

The global hysteria has reached Tel Aviv. As Morgan Stanley scrambles for a buyer and the credit markets freeze up, redemptions from savings vehicles in Israel have soared. From Tuesday, the public has withdrawn NIS 4.9 billion from savings funds.

"They're in a panic. People want their money. They're hysterical," said the manager of a big mutual fund Thursday. "They're breaking savings funds. They've lost their faith in the financial system."

Thursday Israel's mutual funds sector alone saw NIS 1 billion taken out, on top of NIS 2.5 billion in redemptions on Wednesday. Nor are investors showing the love for other avenues. Provident fund managers estimate that a quarter billion shekels were taken out each day this week. The withdrawals aren't as strong at pension funds, if only because the money in them isn't accessible without paying a hefty penalty: tax of 35%.

The world's central banks allied Thursday to inject extra funds into global money markets, hoping to bring down high market interest rates and tackle the latest liquidity bottlenecks. The European Central Bank, the U.S. Federal Reserve, the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada said they were working closely together to ease liquidity tensions.

Share prices in Tel Aviv lost ground Thursday, but moderately, unlike Wednesday's plunge. Yet the general public is even losing its faith in the banks, says a mutual fund manager. That can turn into a self-fulfilling prophecy, he added. That said, where is the public putting the money taken from provident and mutual funds and ETFs? Into bank deposits, mainly, he says.

Provident funds had a bad day Thursday. Even though they're supposed to be long-term savings vehicles, depositors don't always have the patience to let the money sit, especially in a bear market. In the last few days redemptions have reached hundreds of millions of shekels. From the start of the year, the provident funds have been admitting to negative returns as bad as -13%.

Though stocks were relatively unhurt Thursday, the market for corporate bonds is in turmoil as the global financial markets writhe. The collapse of the great Wall Street investment banks has exacerbated the credit crisis even more, which spells bad news for the highly leveraged mega-corporations listed in Tel Aviv. Their borrowing costs are likely to soar when credit can be had at all, and yields on the bond market are indicating a deep crisis of faith. The Tel Bond-20 index lost 3.7% Thursday, which is a lot for a bonds index.

The index, which tracks the 20 biggest corporate bonds by market capitalization, has now sunk for 10 days straight.

Lev Leviev's Africa Israel B21 bonds crashed, losing 20%, and Nochi Dankner's Discount Investment's B6 bonds dived by more than 10%. Gazit Globe B4 paper dropped almost 10%.

One reason for the steep drop is low liquidity. Sellers aren't being met by buyers, which is depressing the price even more.

A trader said that it isn't only the general public fleeing corporate bonds: Several institutional investors are also selling heavily, apparently to increase their own liquidity.