Viewpoint / The Biggest Collapse in Israel

Clubmarket's collapse is the country's biggest in a decade. True, the Tevel cable company and Gad Zeevi's purchase of a 20 percent stake in Bezeq wound up creating more debt than Clubmarket's NIS 1.4 billion. Theoretically, then, their collapses were bigger, but they were also tightly focused. Their implosion affected the banks, nobody else.

Clubmarket's case is different: It triggered a tsunami washing over the business community. Customers who bought the company's gift vouchers are one victim; Clubmarket's voucher partners, such as Fox and Steimatzky, are other victims; but the worst-hit are the supermarket chain's thousands of small-to-big suppliers. Many of them may also collapse as Clubmarket defaults on massive debt.

The suppliers are the tragic heroes of the story, the dramatic heroes who will determine the chain's fate. The banks also are owed a fortune, but their role here is secondary. They could shut off the credit tap and force the company to seek creditor protection, as it did Tuesday, but they won't determine whether it survives or falls. The suppliers will determine that, and soon, too. Their decision whether it will continue supplying cheese and chocolate, pasta and detergents is crucial: if the shelves stay full and the branches open, the chain can try to restructure.

Don't envy the suppliers, who face the hideous dilemma of losing all now, or risking losing even more.

Again the banks were a disgrace. They lent the Borovich-Mozes group money to buy Clubmarket in late 2001, by which time the intifada had been raging for about a year. The economy was already in free-fall, and the supervisor of banks already had forced the banks to increase their provision for doubtful debt. Times were bad, yet Bank Leumi lent the Borovich-Mozes group $80 million to buy the chain, with no securities whatsoever, except for an attachment to shares of Clubmarket itself (non-recourse).

At the same time, the bank continued to lend money to Clubmarket, a risky endeavor by itself. Therefore, the bank found itself doubly exposed to Clubmarket, an adventure that any experienced bank like Leumi should have avoided like the plague.

Many an eyebrow was raised lately at reports that extremely wealthy Jews Haim Saban and Sir Ronald Cohen will borrow $600 million to buy controlling interest in Bezeq from a consortium of Israeli banks, led by Leumi. Saban and Cohen are international figures who'd be welcome at the top offices of any bank in the world. Their preference for credit from an Israeli bank, which is small by international standards, begs suspicion that Leumi offered terms that no other bank would. Ergo, regarding corporate credit, Israel's banks are still giving the best deal in town.

The conclusion is that little has changed in the four years between the loans to buy Clubmarket and the loans to buy Bezeq. In both cases, the banks eagerly hurled exceptionally cheap loans at the buyers. The unbearable ease by which the banks handover huge sums, unbacked by collateral, is in utter contrast to the tremendous difficulty households or small businesses have in extracting credit from the banks, and forget about unsecured credit.

The gargantuan difference in the way the banks treat households and big business arouses suspicions of cross-subsidization. The banks feel free to lend big business money nearly for free, because they have plenty of padding from small clients, enough to save them pain if they fall flat with the big loans. There can be no other explanation for why the banks continue to lightly toss loans at the business sector.

As long as the banks get to keep their padding, which means as long as the two big banks retain control over households and small businesses, the chances that the banks will change their ways are vanishingly remote. For that, we need a reform: the Bachar reform.