Debt-rescheduling Has Exceeded All Bounds in Israel - Hopefully, That's Going to Change
New committee offers opportunity to set policy on problem that is only likely to grow worse over time.
A massive NIS 28 billion in savings that the public had in provident funds, pension funds, employees' professional training funds (keren hishtalmut) and mutual funds has been subject to debt rescheduling agreements since 2008.
And the future doesn't look so rosy either. This year and next, more than NIS 12 billion is at risk of being subject to debt-rescheduling, according to the Israel Securities Authority.
This frequently involves not just deferring the repayment of debt but writing off large portions of it. Worse still, the financial reports of a third of the companies traded on the Tel Aviv Stock Exchange contain advisories from their auditors about financial problems, including in some cases "going concern" warnings that signal the accountants' worries about the company's ability to survive.
This week the Finance Ministry and the Bank of Israel announced they were forming a committee, to be headed by the Finance Ministry's new Director General, Yael Andorn, to examine situations where companies demand that their creditors reschedule debt. Her colleagues on the panel include capital markets commissioner Oded Sarig, and banks supervisor David Zaken.
Marginal issue
Treasury and central bank officials including Sarig and former Finance Minister Yuval Steinitz had for some time argued that debt rescheduling was a marginal issue, but now its importance and its economic consequences have been recognized.
This was even put into writing in the panel's appointment: "In recognition of the wide-ranging consequences of the debt rescheduling phenomenon on the financial system and public confidence in it, and furthermore on the ability of business entities to continue to raise debt to expand their business activities, we have reached the overall conclusion that there is a need for a comprehensive examination of the various aspects of the debt rescheduling issue. As noted, this is a current need, [important] in addition as a result of the concentration of economic power in the Israeli economy in general and in the credit sector in particular."
And rightly so. The implications of nonpayment of debt or a failure debt rescheduling agreement go beyond the relationship between a company's controlling shareholder and the members of the public who have lent the firm money. It has a destructive influence on public faith in the capital markets.
Furthermore a breach of trust of this nature could stifle the flow of funds to the capital markets, do damage to the savings of the members of the public and hurt the growth prospects of the companies that encounter trouble raising capital.
The committee's appointment papers authorize the panel to develop recommendations on a wide range of issues. It is empowered to establish guidelines that would govern debt rescheduling in different business sectors and to look at the implications of the proposed principles on the availability and cost of credit.
The panel was also given authority to develop binding protocols for debt rescheduling to avoid concerns over conflict of interest in the negotiation and approval process. The committee has been asked to draft principles regarding limitations on controlling corporate shareholders in instances in which debt forgiveness causes substantial harm to a company's creditors.
Granted, debt rescheduling and failure to pay debt are a feature of the capital market. Without some risk, there would also be no entrepreneurship or business success. In Israel, however, the phenomenon has exceeded all bounds. Too many companies have gotten themselves into a situation in which they cannot meet their financial obligations.
Sometimes the creation of a government panel results in the issue simply being buried. A committee can meet repeatedly over two or more years with nothing to show for it. Let's hope that won't happen here, and that the new committee addresses the rewards and punishments of the capital market.
When a company thrives so do its owners, but when it fails to meet its obligations the creditors should take over. They might lose some of their investment but there will at least be a chance that it can recover its value in the future.
Just as a mortgage bank forecloses when the owner defaults, so too should a controlling shareholder lose his business if he fails to inject additional capital and his company defaults.
Andorn, herself a former pension-fund director, was among the first to demonstrate institutional activism on behalf of individual members of the public. She was also involved in Zim Integrated Shipping Services' initial debt rescheduling agreement.
In her new position at the treasury she must now prove that she has a sense of mission. She must make sure that a controlling shareholder who has borrowed from members of the public does not remain in control of his company in the event he is let off the hook when the money is not repaid.