Focus / The Lesser Evil

Having failed to cobble together a coalition, the prime minister decided to dissolve the Knesset. Instead of dissolving into tears, investors applauded, accepting the upheavals with open arms.

Prime Minister Ariel Sharon's announcement that elections would be held in January 2003, sent stocks soaring from their 3.5-year low.

The capital market seems unconcerned about the fundamental instability innate in yet another change in government in less than two years.

The market's concerns are chiefly short-term. The main reason for the hoo-hah was the evaporation of two major concerns created when the coalition government collapsed. One: the government would fail to push through a budget for 2003. Two: Sharon would set up a narrow hard-line government.

Market players feared that after Labor walked out, the government wouldn't be able to pass the budget for 2003, or it would have to pay a heavy price for the support of narrow-interest small parties. But the politicians apparently have worries of their own, not wanting to look like troublemakers just before elections.

Stocks slid last week on the possibility that Sharon would set up an extreme right-wing government, the opposition it might have aroused overseas and the probability of further escalation in the hostilities with the Palestinians, coupled with the potential for a sovereign credit rating cut.

Now there is hope that new elections will restore political stability. They may not, but there is hope. The optimism is also boosted by the rating agencies all shruggingy, saying they had expected political upheaval and that it alone was not reason to downgrade Israel's sovereign rating. The main thing, they say, is that the budget pass without being castrated.

"The market sees early elections as good news, because it was clear that a narrow government would not function," says Peilim Portfolio Management chairman Dr. Yoram Gabbay. The market knows elections are not a good alternative, he qualifies, but they are the better one.

Until this point, the economy has been meandering down a dead end, Gabbay continues. "In 2003, economic growth is expected to be negative because everything is in decline," he says. "Nothing seemed about to change anything. Therefore, the establishment of a new government that could make substantial changes in its first few months in power might improve the economic situation."