Taking Stock / No Resting on Laurels

Nochi Dankner looked at the screen. The Israel Discount Bank's chart showed the stock had reached a 12-month high of NIS 3.7 per share on Monday. Get me those guys from UBS, he yelled.

An hour and a half later, he had the undivided attention of Yaron Bloch and Hadar Oshrat, two young brokers who had spent the last two months advancing a new vocation - selling shares for interested parties on the Tel Aviv Stock Exchange.

I want to sell a big chunk of Discount stock at a 4 percent discount, he told them. Go do a deal. Can't, we can do 5 percent, they answered. Okay, make it 4.8 percent, Nochi ruled.

The next morning, UBS Warburg's investment committee convened in London. On the agenda was Dankner's proposal to sell UBS an NIS 200 million block of Discount Bank shares, from the chunk held by his company, IDB Holding Corporation. By nine in the morning, Bloch and Oshrat had the word: It was a deal.

Mere days later, it transpired that Dankner's timing was perfect. Discount Bank traded yesterday at around NIS 3.3 per share - down 10 percent from last Monday's price. Given the grimness of the mood sweeping across the Tel Aviv Stock Exchange, it's going to be a lot harder to market shares that fast.

The NIS 200 million Dankner raised go straight to IDB's bank account, whence they can be converted, without hitting obstacles or dilutions, into dividends, thereby helping Dankner repay the loans he took out to buy IDB.

Dankner may be feeling relief. But Israel is crawling with leveraged tycoons who breathed a lot easier as the stock market climbed in the second quarter, and who are starting to gasp and snort again.

Sighs of relief

The bankers backing insurance magnate Shlomo Eliahu could also boast a respite from stress. They had been sweating bullets earlier in the year as the bank shares Eliahu had bought using hundreds of millions of borrowed dollars tanked, dropping tens of percent below the price he paid.

The surge on the market was a shot in the arm for Eliahu, who managed to sell NIS 175 million worth of The Israel Phoenix Assurance Company shares, getting NIS 14 per share. In parallel, the banks eased the pressure on him as the value of his bank shares climbed.

Yesterday, Phoenix stock was trading below NIS 12. Eliahu, like Nochi Dankner, can thank his lucky stars that he got rid of the stock. But Eliahu, like so many others, knows well that if the market remains weak, it will be harder and harder for him to service his loans.

The swell on the stock market, the drop in interest rates and the rapid appreciation of the shekel were key to the support the business sector's leaders lent to Finance Minister Benjamin Netanyahu. The rebound eased the financial pressure bowing their backs, while Netanyahu was perceived as being resolute about pursuing painful, but necessary, steps.

Losing momentum

But in the last month, as stock and bond prices slithered down, signs began to appear that Netanyahu is losing his momentum. The most prominent sign was his regression to spatting with the Bank of Israel.

Instead of focusing on leading the next wave of structural reforms, Netanyahu is back to interfering with Bank of Israel governor David Klein's interest policy. The latest leaks from the treasury leave no room for doubt: War with the central bank is back in town.

In his first two months as finance minister, Netanyahu frequently pointed out how the government bonds market had bounded since the treasury announced its economic program. He even said that Federal Reserve Board chairman Alan Greenspan had told him that the fall in Israeli rates was the best indication that he was making the right moves.

Note the developments on the bond market in the last six weeks: While Bank of Israel interest dropped from 8 to 7 percent, interest on 5-year government Shahar bonds shot up by about the same magnitude, from 7.5 to 8.3 percent.

The rising yields on the bonds market reflect the jump in U.S. lending rates in the last month. But they also reflect rising apprehension among investors in Israel and abroad about the government's ballooning deficit.

Whether the underlying cause is foreign interest rates or the deficit here at home, the rising interest on government bonds is another reminder to Netanyahu that reducing Bank of Israel lending rates is no panacea. Interest rates, like the economy itself, are influenced by a long list of real and financial parameters, led - first and foremost - by the deficit. Netanyahu also knows that if not for the $9 billion in U.S. guarantees that the government is supposed to get over the next three years, the financial markets would be in far worse shape.

The slide of government bonds to interest of 8.5 percent is particularly worrying, given that the U.S. loan guarantees allow the government to avoid raising net debt on the local marketplace - a privilege it hasn't had for years.

Netanyahu has plenty of friends in the business sector. Some are these highly leveraged businessmen trying to shed stock in order to repay heavy loans. Up to now, they have stood firm behind him, as they are people who appreciate the bottom line.

Maybe now, though, they'll start to delicately hint to buddy Bibi that his economic program was just the first step in the right direction, and that the situation of the economy cannot give him respite to rest on his laurels - or to resume fruitless infighting with the Bank of Israel.