The Tents and the Tycoons

Why are the their stocks falling, and what's the link to the protests, U.S. ratings downgrade and our pensions?

Why is this feeling like the 2008 crisis?

Because it's really quite similar. Once again there's a debt crisis bringing down the capital market worldwide and once again there's a crisis of faith, and investors are fleeing. Three years ago banks were saved by governments. Today governments are in a bad way and it's not clear who will save them and how they will pay their debts.

tel aviv, protest
David Bachar

It began at the end of last week when, for the first time in history, Standard & Poor's downgraded the United States' perfect credit rating.

The downgrade has shone a spotlight on the debt problem: The world is a more dangerous place for savers and investors. One of the interesting phenomena in the markets in recent days has been that many people are selling government and corporate bonds that have not had their ratings lowered, and they're buying lower rated U.S. bonds. That is, the market is smelling that the crisis is going to spread to other countries, and there is less suspicion that the United States will not pay its debts.

Is there a problem of government debt here too?

Not at this stage. But today there is pressure on the Israeli government to increase spending, in part because of the tent protest. If the government doesn't withstand this pressure, and its income decreases because of the crisis, there is no doubt this problem will spread here too. Breaking the budget framework could mean destructive results for Israel.

From the national accounting perspective, is it already possible to see the global crisis affecting us?

Yes. In recent months one could discern a slight slowdown in tax revenue. But this is nothing compared to what will happen here if the crisis abroad worsens. Israel is a country biased towards exports, and it will be badly affected by the crisis.

How far can this go?

A worsening of the crisis is liable to cause a decline in consumption, layoffs, pay cuts and business closures.

I've read that the tycoons' stocks are falling.

Yes, and more importantly, their bonds are falling. In addition to the international crisis, it appears that in Israel a significant debt-payment problem is developing for the holding companies controlled by the tycoons.

Why are the falling bonds a problem?

When bond prices drop their yields rise - that is, anyone who has bought them is ensured higher yields. But high yields are not necessarily positive, since they imply that the market thinks the borrower will find it harder to repay the entire debt. And vice versa: Every time prices go up (and yields drop ), the market thinks the debt is more secure.

Which tycoons have suffered a particularly bad week?

Nochi Dankner, Ilan Ben-Dov and Moti Zisser saw their stocks and bonds drop by dozens of percentage points. Yitzhak Tshuva and Yossi Maiman are also having problems. The market thinks they will not be able to repay their whole debt to the public.

How much do the tycoons owe?

More than NIS 100 billion.

Where are Dankner's problems coming from?

Dankner's difficult week began with the fall of Credit Suisse shares, in which he had invested NIS 7 billion via the holding company Koor Industries. Apparently, however, the problem for IDB shares and bonds is not just the Credit Suisse investment. There are greater anxieties.

What happens when everything goes sour for tycoons, and what does their plight have to do with the tent protest?

They are being plagued by a number of problems simultaneously. The tent protest and the fight against the high cost of living are magnifying their troubles. First of all, they find themselves at the peak of a global crisis with their portfolios laden with debt. The crisis is liable to lower their companies' revenues and profitability - which will affect their ability to pay off debt. In addition, the crisis is diminishing the possibilities for selling assets and companies - and it's certainly lowering their value.

Moreover, the telecom companies particularly have a problem, mainly Partner and Cellcom, whose revenues have been harmed by the deregulation and competition imposed on them by the Netanyahu government, led by Communications Minister Moshe Kahlon.

At the same time, the public has negative feelings about them, and two committees are at work, some of whose conclusions will hurt the tycoons: the centralization committee, which might well decide on separating real assets from financial assets and the Trajtenberg committee, which apparently will decide to raise the company tax - thereby striking another blow to their profits.

Will they really not pay what they owe?

Hopefully they will ultimately repay everything, but it's clear that the danger to debt repayment increased sharply this week. Today one can buy these tycoons' NIS 1 bonds for NIS 0.60 to NIS 0.70. The problem is that in the near future some of these bonds will have to be redeemed, and to do this the tycoons will have to raise money on the capital market. In the current crisis atmosphere, and with such high yields (yields above 10% are called junk yields ), they will not be able to raise the money.

Is this their only problem?

This is no small problem, but they have another problem. The fall of their share prices is diminishing the value of their assets, so the risk linked to their personal debts to banks is also increasing.

Is this why the bank shares are falling?

Yes. And this is creating the anxiety about a financial crisis.

What's this whole business about pyramids and how does it affect the person on the street?

Someone with a controlling interest holds huge assets by using relatively small change. The centralization committee aims to reduce this phenomenon, but it has not yet done so. The declines in recent days reveal that a pyramid can fall only because it is a pyramid, because a subsidiary with troubles can drag the parent company down into a financial vortex.

And what about the separation of financial and real assets?

The committee was supposed to deal with this, too. Ownership of a financial asset and a real asset by the same group constitutes a conflict of interest and can hurt savers. The damage could occur because of the chance that the public's money will not be managed objectively and will not be channeled to the safest and best place to invest. Rather, it will be managed based on the needs of the group it belongs to. Hence the need to carry out a total separation of ownership.

How do the tycoons' losses affect my pension?

Most of our pension funds are invested in stocks and bonds on the capital market, so when there are drops our savings are affected. And next month, not only might the United Nations declare a Palestinian state, but the people will be getting in their mailboxes their August statements for their pension investments. This will hurt a lot of people and will put pressure on the government to put its hand in its pocket and pay.

So does this mean the tent protest is bad news for my pension?

In the short run it can be said that yes, it's bad news for your pension. What's good for us as consumers and citizens is bad for us as pension savers. This is because lower prices and damage to the companies decreases their profitability, and we, after all, are the tycoons' partners in those companies. In the long term, a structural change for the better will create more competitive and efficient companies, and their profitability will return. Moreover, a lot of money in those companies is going towards insane executive pay and other wasteful spending - so it's better that this should go to consumers.

What will happen if a tycoon falls?

There will be lots of noise and lots of political pressure that will be widely covered in the media. But in principle it shouldn't affect Israel's economy. At most, a tycoon's shares will be distributed to creditors. No worker will lose his job.

I've heard that there is talk already about a safety net for savers.

There is talk and presumably there will be more talk as the declines continue. In January 2009, after considerable pressure, the previous government decided on a safety net for some savers. The safety net was never deployed because the markets recovered.

Is Prime Minister Benjamin Netanyahu pleased that the protest is now attracting less interest?

No. Maybe a few spin doctors and media advisers are pleased, but in general this is a real danger to Israel's economy.

Could it be that after the sharp declines we see opportunity for buying certain stocks and bonds?

It is indeed possible that the market is hysterical and too cowardly. One has to analyze every company according to the value of its assets, the size of its debt and its expected cash flow vis-a-vis its expected disaster flow.

So maybe the situation isn't all that bad.

Of course it isn't. So far the local economy has displayed stability and strength, in part because of the government's efforts over the past two decades to maintain a small deficit. While the high housing prices are definitely upsetting many people, and rightly so, they are also the result of a successful economy.

Do the high housing prices benefit anyone?

The truth is that there are a lot of people who are not at all interested in lowering the prices. There are hundreds of thousands of people who are earning a very good living from the industry, among them architects, interior designers, realtors, contractors, sales people, members of purchasing groups, landowners and a million apartment owners whose sense of being prosperous has changed because of the rise in housing prices. They are consuming more because of this. Even the government is benefiting from this through its taxation system. It can't be said that the real estate surge is not contributing to the economy.