Finance Ministry Unveils NIS 11 Billion Bailout for Economy

Figures show crisis spreading into Israel's economy at large; Bank of Israel lowers key lending rate.

The treasury announced on Tuesday its intention to inject NIS 11 billion into Israel's economy as part of a bailout plan to combat havoc wrought by the global financial crisis.

The Finance Ministry said that the purpose of the plan was to repair flaws in the economy and extend credit reserves in the wake of the crisis.

The plan will include NIS 6 billion of government guarantees for raising capital in the banking sector, on top of NIS 5 billion for setting up investment funds to bolster shareholders. It will also include a tax reform that would encourage cash flow into the stock market.

Treasury officials project that the NIS 11 billion guarantees would facilitate transactions worth tens of billions of shekels. They said that the extent of the global credit crunch and its impact on the Israeli economy require these rather vigorous measures at this uncertain time.

Finance Minister Roni Bar-On said that, "We will continue to do whatever it takes to tackle the impact of the global crisis on Israel's economy."

Meanwhile, government agencies released a series of downbeat economic statistics Monday, which show that the crisis is spreading from the financial sector to the rest of the economy.

The Government Employment Service reported that the number of job-seekers rose by 2,100 people in October, to 193,200, from 191,100 in September. Of these, 15,000 were newly unemployed, including 10,000 who had been fired from their previous jobs. Moreover, the number of unemployed people with a college degree rose by 2,500 over the last six months, the service said.

At the same time, the Central Bureau of Statistics reported that gross domestic product grew by only 2.3 percent in the third quarter, compared to 4.1 percent in the second quarter, while the business product rose by a mere 1.9 percent, down from 5.8 percent in the April-June period. Moreover, exports fell by almost 10 percent, with diamond exports in particular plunging by 57 percent.

Bank of Israel Governor Stanley Fischer responded to the crisis Monday by lowering the bank's key lending rate to its lowest level ever - 2.5 percent. This will make borrowing cheaper, and thereby hopefully encourage economic activity.

The Israel Securities Authority, for its part, is currently setting up special funds, to be jointly owned by the government and private investors, that would buy up several billion shekels worth of corporate bonds. Many of these bonds are now trading at junk-bond levels, making it hard for companies to raise money to finance new activity. Buying them would thus theoretically encourage economic activity by making additional funds available.

The ISA move resembles a proposal made by Likud chairman Benjamin Netanyahu to Prime Minister Ehud Olmert at their meeting last Thursday.

The Finance Ministry, meanwhile, is working on a safety net for pension savings. The emerging plan, which would cost some NIS 10 billion, will apparently cover only a few tens of thousands of savers: people aged 60 and older who earn less than twice the minimum wage, or about NIS 7,700 a month. The safety net will not be retroactive, however; it will guarantee savings only from the date on which the Knesset approves it.