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Thursday, January 15, 2009

Is Israel the next Iceland?

Bloomberg.com reports that Israel may be the next country to be dragged down by the ongoing world financial crisis.
The country’s 15 largest real estate companies have about 140 billion shekels in overall debt, more than three times the amount in 2003, according to Dun & Bradstreet Israel.

“Pointing a finger at Delek Group Ltd. and Delek Real Estate, as well as Africa Israel, as the central reasons for the situation in the capital and pension market is a radical distortion of the reality,” Delek Group said today in an e- mail. The companies “have always been able to cover their liabilities and will continue to do so in the future.”

About 50 billion shekels of that debt is in the hands of those saving for retirement in so-called provident funds, long- term investment vehicles similar to U.S. 401(k) accounts that offer tax-free savings for employees.

Investors are suffering partly because of the billionaires’ property losses and from concern the companies they control won’t be able to pay debts or find refinancing because of the credit crisis.


Leviev’s Africa Israel Investments Ltd. bought the former Times headquarters on Times Square for $525 million. It paid $200 million for the 19th-century Clock Tower building on Manhattan’s lower Broadway, saying it would be converted into 55 apartments designed by Italian fashion company Gianni Versace SpA.

Those overseas deals were backed in part by investors and fund managers who acquired the company’s bonds, rated AA by Standard & Poor’s-Maalot. Leviev, the chairman of Africa Israel, moved to London last year, spending a reported 35 million pounds ($51 million) for a property in the Hampstead neighborhood.

Tshuva is estimated by Forbes to be worth $3.5 billion. As a contractor, he profited from the construction boom during the immigration of Russian Jews to Israel in the 1990s. The 60-year- old took over Delek, Israel’s No. 2 oil and gas company, in 1998.


Delek Real Estatehas about 2.8 billion shekels in outstanding bonds, according to the Tel Aviv Stock Exchange. Africa Israel has 7 billion shekels, according to the company.

Their bonds were snapped up in oversubscribed offerings, and were the most-traded notes on the stock exchange in October, according to Bank Hapoalim Ltd.

In April 2007, Delek Real Estate bought 47 hotels in the U.K. operated by Marriott International Inc. It also acquired RoadChef Motorway Holdings Ltd., a U.K. operator of highway service stations, for $738 million and owns the building leased to Britain’s Foreign Office.

Israelis hold about 220 billion shekels in provident funds and employee benefit funds, the Finance Ministry said. Through November, provident funds lost an average 17.8 percent. The long-term investments account for about 30 percent of the 200 billion-shekel corporate bond market.


The losses have investors heading for the exits. About 3.5 billion shekels were redeemed from provident funds in October, according to Meitav Investments & Securities Ltd., which tracks the industry.

On Dec. 14, the cabinet approved a plan by Prime Minister Ehud Olmert to guarantee pensions and long-term savings up to 750,000 shekels, or about $193,000, for people age 57 and older. He said the aim was to provide a monthly income equal to the country’s average wage, which is 8,210 shekels.

The decision came after the Histadrut labor federation, which represents more than a quarter of Israel’s workforce, threatened a nationwide strike. The government didn’t estimate a cost for the program.

During the deregulation of the capital markets in 2003, the non-bank credit market expanded as union pension funds were privatized and the banks were forced to sell their asset- management units, creating a new class of institutional investors who had previously invested mainly in government debt.
On Tuesday, I had a meeting with one of the pension funds and they told me that they are investing only in government bonds. The question is whether the government will be able to pay its debts. The big objection right now to the pension bailout is that if you make more than NIS 8,210 per month, you get nothing. But expanding the plan to cover that minimum amount for everyone (which would be a fairer solution) would cost more in taxes, and raising taxes would totally stifle business or drive even more of it underground. An astounding amount of business is done here on a cash basis and is never reported to the tax authorities, and the basic assumption is that unless you are an employee working only one job, you are cheating on taxes. And don't expect the government to cut other spending to pay for pension coverage - the Histadrut has its fingers in too many pots to allow that to happen.

I wonder what the odds are on Netanyahu being Finance Minister in the next government. He seems to be the only one who can put a stop to the handouts.


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