Lost Confidence

Israel's financial woes

Israeli banks once boasted that they were "the economic oxygen of the nation." Today, however, the banks are struggling for breath along with the rest of that country's ailing economy. A bizarre financial crisis, triggered by last year's devaluation of the shekel, has shattered public confidence in Israel's lenders and forced them to slash services. With annual inflation running into three digits (190.7% in 1983), Israelis are accustomed to speculating on the government's frequent devaluations.

Last August, amid fears that the modest 7.5% devaluation would soon be followed by larger ones, speculators began dumping bank stocks in order to invest in U.S. dollars. The sell-off grew so heavy that the Tel Aviv stock exchange closed on Oct. 7. Three days later, government officials declared a 23.5% devaluation. When the market reopened two weeks later, the value of the stocks plunged 17% in a single day. To prop up their sagging shares, traditionally one of the most popular and profitable Israeli investments, seven banks pumped more than $1 billion into the stock market.

Nevertheless, selling remained so fierce that the banks went to the government for help. After an emergency all-night meeting between the Treasury and the state-owned Bank of Israel, the government agreed to redeem, at the market price just prior to devaluation, commercial-bank shares that had been held by individuals for four years.

When the slide finally ended last month, the Treasury had shelled out $600 million to investors. It was also stuck with a commitment that could cost some $4 billion more by 1988. Israel's banks offer financial services that range from making loans to acting as stockbrokers. They are now retrenching to cut their losses. One tough move was aimed at the many depositors who habitually overdraw their bank accounts between monthly paychecks. The banks have begun charging stiff monthly rates of up to 16.25% for overdraft privileges, compared with some 13% in December. Other steps have included stricter credit-card policies and a 20% increase in fees and commissions on most transactions.

Such moves have outraged many in a nation in which economic discontent has already spawned a wave of protests. Declares one disgruntled depositor: "I will keep large amounts of cash on hand and will pay all my bills in cash." Others have been lining up to open accounts at hitherto little-used post-office banks, where services are limited but attractively free of charge.

Israelis are annoyed that bank officials continued to tout their stocks last year even as prices fell. Rumors that some bank executives were simultaneously selling their own shares have increased the public's ire. Said one bitter investor, whose banker had persuaded him to keep his stock: "I was patriotic and rescinded my sell order. I lost about 70% of my pension money as a result." The crisis has sparked numerous lawsuits and demands for investigations. "The complicity and duplicity of the banks and the government are something that deserves being looked into," says Joseph Morgenstern, a Tel Aviv financial consultant.

The image of Israeli bankers could be damaged further by a probe launched late last year by the Histadrut, Israel's major labor federation. The organization, which runs Bank Hapoalim, the nation's second largest bank, is investigating rumors about Yaacov Levinson, a prominent Labor Party member and the bank's former managing director. Levinson, according to stories that he angrily denies, shifted bank funds abroad without authorization. Last week the Israeli Attorney General joined the Bank of Israel and a parliamentary committee in looking into the charges. The so-called Levinson Affair has already deepened the loss of confidence in Israel's troubled financial institutions.