Taking Stock / Bibi on the Soapbox

Now, we certainly don't want to be party poopers.

After three years of economic contraction, massive job cuts, corporations collapsing like dominoes, dreams dying, and gloom on the capital market, we'd also love a shot of good news - of a trend change, for instance.

Just look at the recent business headlines: GDP rose 2.7 percent in the third quarter. Finance Minister Benjamin Netanyahu declared the recession over. Israeli entrepreneur Menashe Benjamin is getting $25 million for selling his start-up to Eastman Kodak. And the TA-100 index jumped 2percent, crossing the 500-point benchmark. A nice change, to be sure.

We can also understand Netanyahu, who rushed to announce the economic turnaround from every available soapbox. Nine months ago, when taking the job as finance minister, he received a sick economy in a terrible mood. Fearing financial crisis and insanely high interest rates, he initiated a series of dramatic moves, and, for the most part, managed to market them too. And lo and behold, the economy is stabilizing; the stock market is soaring; interest rates are dropping; and now even GDP is starting to grow anew. It is only human that he'd hasten to claim the credit.

The real trigger of change

Yet it is incumbent upon us to stare reality in the face, understand the processes and determine exactly what has happened, and what has not.

The main trigger of change wasn't the Finance Ministry's economic program, nor the turnaround in the business sector. It was the Americans' decision to grant Israel $9 billion worth of loan guarantees.

The guarantees eradicated the possibility of financial crisis, for the time being. They allowed the government to drastically reduce fund-raising on the domestic market, and helped relieve the credit crunch that had been cutting off the marketplace's oxygen.

True, until now the treasury has raised only $1.6 billion backed by the guarantees; but that isn't the point. The point is that as soon as investors here and the world around realized we had a long-term, cheap credit line from the United States for the next three years, their willingness to lend the Israeli government money jumped on the spot.

The guarantees are the main reason long-term interest rates have been sliding fast in the last few months, even though the government's budget deficit is mushrooming toward a terrifying 5-6 percent of GDP this year. The guarantees are the reason the markets are largely ignoring the fact that next year's deficit will be gargantuan too. Without the guarantees, a deficit of that magnitude would dictate more tremendous Israeli government bond issues, and an even tighter credit crunch.

The falling long-term interest and stabilization on the financial and currency markets enabled the Bank of Israel to relax its monetary vise, after a year of agonizing crush. And the rate cuts by the central bank have been the main reason for the surge on the stock market in the last few months.

The third variable affecting the stock market, and some exporters too, is the rally on the American stock market, and signs of economic recovery in the United States. Most Israeli blue chips that rose from 50 to as much as 200 percent in the last few months are affiliated directly or indirectly with the United States in general, and the Nasdaq in particular.

The combination of climbing Israeli government bond prices and rising stocks created terrific capital gains for investors. It gave Israel's tycoons some breathing room and improved the mood among investors in mutual funds, provident funds and in insurance company profit-sharing programs.

As for Netanyahu, the moves he led are of three kinds. The first is genuine structural reform that will bear fruit in the long run, but is meanwhile encouraging investors and business. First and foremost on this list is reform of the pension sector.

Second are the one-time changes to halt the economic deterioration. But these still fall far short of what's needed, mainly as far as budget cuts and public sector wage cuts are concerned. These are steps in the right direction, but only baby steps. The budget deficit and debt/GDP ratio are still deteriorating.

The third kind relates to changes that hit the headlines, make a tremendous impression on the public and on foreign investors, but contribute little in either the short or long run. This refers to ostensible "privatization" efforts such as selling blocks of Bezeq (TASE: BZEQ) stock to investors on the Tel Aviv Stock Exchange.

Yes, the last few months have brought signs that the economy is stabilizing or changing, if only because it started from such a low place a year ago. But much of the change is due to external events, or financial causes. In the most painful areas of all, unemployment and the eroding standard of living, it is hard to be optimistic. Netanyahu's declaration of the recession ending is still nothing more than an encouraging word.