Debt Worries in Israel Grow as Study Finds Borrowing Has Fed Spending Spree

Israeli lawmakers seek steps to rein in borrowing, but Bank of Israel says levels not yet dangerous

Bank of Israel chief Karnit Flug presenting the new 200-shekel bill, December 2015.
Bank of Israel chief Karnit Flug presenting the new 200-shekel bill, December 2015. Emil Salman

Warning bells over rising consumer debt were sounded on Monday as the treasury issued a report saying borrowing was rising at levels similar to the United States prior to the subprime crisis and Knesset members called for the Bank of Israel to take steps to rein it in.

Finance Ministry Chief Economist Yoel Naveh said in a study released on Monday that much of the big rise in consumer spending that has fueled Israel’s economic growth in recent years was done with borrowed money.

The report said household credit, including the mortgage borrowing that has grown with rising home prices, climbed 7.5% last year alone. Subtracting home loans, the rate grew an even steeper 9%, the report said.

“There is a worrying increase in the nominal growth of household borrowing, but it’s still not at a dangerous level, We are constantly comparing our level of debt to global levels and by international standards we’re still at a low level,” Yossi Saadon, a Bank of Israel official told the Knesset Finance Committee on Monday.

“On the other hand we’re witnessing reforms that are aimed increasing competition in consumer credit and more competition will encourage more borrowing, which we have to take into account,” he said, citing Bank of Israel figures showing a 23% increase in household borrowing over the last three years.

Saadon’s forecast was echoed in the treasury report, which said the low interest rates and low unemployment that had encouraged the consumer and borrowing spree in the past few years were likely to continue into the foreseeable future.

Moshe Gafni (United Torah Judaism), chairman of the finance committee, asked regulators to update the panel about the steps they planned to take to prevent a financial crisis. He said he was anxious to see the consumer credit database get into operation so that lenders could get a better picture of a borrower’s financial condition.

Meretz leader Zehava Galon expressed concern about a 75% increase in the number of personal bankruptcy applications. “If we don’t relate to this now in a serious way, it will blow up in our faces in a few years. We need to know how the Bank of Israel is reining in household debt and what the government of Israel’s strategy is,” she said.

Apart from documenting the overall rise in consumer spending and borrowing, the treasury report also found there was a shift in Israeli buying habits, People spent more money on consumer durables, including cars, electronics, furniture and jewelry so that they now account for a record 10% of all household spending. Spending on non-durables, like education and health, also grew but at a slower pace, the report said.

Moreover, the spending and borrowing spree has spread to the lowest income deciles, the report found. Between 2010 and 2014, the number of households in the bottom 10% of earners and those in the fifth decile that own at least one car, tablet computer and at least two smartphones grew by about 10 percentage points,

Among those at the bottom decile, car ownership rose to 33% of families from 23%.

“This phenomenon could be a sign that [income] gaps between different segments of Israel’s population are narrowing,” the report suggested. “These trends could also reflect a change in ‘consumer standards,’ whereby products that lower income groups wouldn’t have bought in the past have become commonplace.”