If the Pandemic Continues, Israel's Government May Lose Financial Bailout Ability

Between 70,000-80,000 companies shut down last year, and tens of thousands will likely close this year as well

Sami Peretz
Sami Peretz
Send in e-mailSend in e-mail
Fabric and clothes are seen on the street during a demonstration by business owners and employees against restrictions placed on their sector,Tel Aviv, January 5, 2021.
Fabric and clothes are seen on the street during a demonstration by business owners and employees against restrictions placed on their sector,Tel Aviv, January 5, 2021. Credit: CORINNA KERN/ REUTERS
Sami Peretz
Sami Peretz

Should the health crisis end by this summer thanks to the vaccination campaign, the main risk facing Israel’s financial system will be a wave of bankruptcies among businesses currently staying afloat thanks to government grants, along with credit limits. So says the Bank of Israel in its financial stability report for the second half of 2020, which it published Monday.

That’s the positive scenario. In the more dire scenario, which forecasts the health crisis continuing into the second half of the year, the economic damage and the public debt will become much more challenging, and it’s possible Israel’s government may no longer be able to help them – which would result in an even larger wave of bankruptcies.

Will ultra-Orthodox rioting move the needle on Israel's March 23rd election? LISTEN

The massive uncertainty since the pandemic began has driven anyone who works in analysis and forecasts to be cautious and draft varying scenarios. It’s already been proven more than once that it’s hard to forecast what will happen, and we’re seeing this right now as the current wave of illness refuses to subside, following the British mutation’s arrival in Israel.

The Bank of Israel, which runs a large research division and serves as an economic adviser to the government, has been working on the basis of two main scenarios for several months now. The first is that the pandemic is brought under control, which would of course positively impact the economy. The second is that the pandemic is not well controlled. The vaccination campaign led the bank to treat the first scenario as more realistic, but the virus mutations have shuffled the deck.

Regarding businesses and bankruptcies, the current situation does not reflect the entire picture, as many businesses are being kept afloat by government grants, massive loans and the banking sector’s decision to permit them to delay debt repayment. Business data companies calculate that some 70,000-80,000 companies shut down last year, and that tens of thousands will close this year as well. And yet, Tax Authority data shows that company closures declined significantly during the crisis, and that there was no increase in bankruptcies compared to the period before the pandemic.

A woman wearing a protective face mask, walks past a shuttered shop during Israel's third national lockdown to fight coronavirus in Jerusalem's Old City January 5, 2021Credit: RONEN ZVULUN/ REUTERS

The Bank of Israel doesn’t believe in this relatively calm picture, and believes that the moment the government cuts off its support, many businesses will go under. There are two main indicators supporting this. The first is the major increase in government debt, which at some point may become too big and halt the government’s support to businesses. The second, more meaningful indicator is the number of bank loan repayments that have been postponed by households and businesses, particularly small companies. As of November, some 52 billion shekels in bank loans – 8.5% of total household debt – were postponed. In the business sector, some 14.3 billion shekels ($4.33 billion) in loans, or 2.9% of the total, is being postponed.

The central bank’s research division forecasts that if there are more lockdowns in the first half of the year, the debt-to-GDP ratio will reach 82%. Should the health crisis continue through the second half of the year, it is forecast to reach 90%. In such a situation, the government would be hard-pressed to continue with its aid. This would bring high unemployment, a major wave of bankruptcies and massive credit write-offs for financial institutions, which would limit credit throughout the financial system.

There’s no question that without this intervention, the stability of Israel’s financial system would have been shaken, possibly to the point of financial institutions collapsing. The fear that this could happen dictated the depth of the government’s intervention, and so long as the risk exists, the government’s intervention is guaranteed. And yet, the Bank of Israel’s forecast of a sharp increase in government debt indicates that the freedom to operate that the government had at the start of the pandemic could shrink in line with the pandemic’s duration.

To ensure that the financial system remains stable, this lockdown needs to be our last – and the economy must reopen as soon as possible. So long as the health crisis goes on, not only will people continue to get infected and possibly die, but many more businesses will go bankrupt.

Click the alert icon to follow topics:



Automatic approval of subscriber comments.
From $1 for the first month

Already signed up? LOG IN


Charles Lindbergh addressing an America First Committee rally on October 3, 1941.

Ken Burns’ Brilliant ‘The U.S. and the Holocaust’ Has Only One Problem

The projected rise in sea level on a beach in Haifa over the next 30 years.

Facing Rapid Rise in Sea Levels, Israel Could Lose Large Parts of Its Coastline by 2050

Tal Dilian.

As Israel Reins in Its Cyberarms Industry, an Ex-intel Officer Is Building a New Empire

Queen Elizabeth II, King Charles III and a British synagogue.

How the Queen’s Death Changes British Jewry’s Most Distinctive Prayer

Newly appointed Israeli ambassador to Chile, Gil Artzyeli, poses for a group picture alongside Rabbi Yonatan Szewkis, Chilean deputy Helia Molina and Gerardo Gorodischer, during a religious ceremony in a synagogue in Vina del Mar, Chile last week.

Chile Community Leaders 'Horrified' by Treatment of Israeli Envoy

Queen Elizabeth attends a ceremony at Windsor Castle, in June 2021.

Over 120 Countries, but Never Israel: Queen Elizabeth II's Unofficial Boycott