Israel Moves to Sell Banks Rescued in 1983

By , Staff writer of The Christian Science Monitor

AIRLINES and oil companies aren't the only businesses in Israel awaiting the embrace of private investors. Following a financial crisis seven years ago that brought them to the brink of nationalization, the country's four leading commercial banks are also up for sale.

Since the four - Bank Leumi L'Israel, Israel Discount Bank, Bank Hapoalim, and Bank Hamizrahi - dominate Israel's credit markets, the gradual privatization envisioned in a new government plan could transform the way the country transacts its business.

``It will take time but it will produce innovations,'' predicts Bank Hapoalim chairman Eitan Berglas.

Recommended: Could you pass a US citizenship test?

The seeds of crisis were sown in the mid-1970s when the banks began artificially inflating their stock prices as a hedge against spiraling inflation.

When investors started unloading shares in 1983, the government had to come to the rescue with a $7 billion stock purchase. The intervention saved the banking system but also made the government the nation's main creditor.

Almost immediately the government came under pressure to resell its shares to the private sector. But that was more easily said than done.

Government officials argued that they could not get the maximum return needed to recoup the taxpayers' $7 billion investment unless it assumed equal voting rights. But that would have meant, in effect, nationalizing the banks just as Israel was seeking to privatize other state-owned enterprises. And the government was reluctant to give preference to the very interests whose mismanagement had produced the banking crisis in the first place.

On the other hand, dumping the shares on the open market would risk placing controlling interest in foreign, non-Zionist hands, with potentially adverse national security implications.

Under a compromise formula worked out by the Finance Ministry and the Bank of Israel, a ``founders' core'' in each bank will be allowed to purchase at least 25 percent of shares, followed by the public sale of stock. For its part the government will freeze the voting rights of the bank shares it retains but will be empowered to break up banking conglomerates and sell off their subsidiaries separately.

THE changeover, which will take several years, will increase competition and efficiency, and position Israel to compete more effectively in international capital markets.

``A country which is so heavily dependent on external trade needs to be in the forefront of selling financial services,'' says Stanford University economist Alvin Rabushka, whose just-published ``Scorecard on the Israeli Economy'' says privatization efforts have been the ``brightest spot in the entire Israeli economy during 1989.''

``Israel can't do this if its internal banking system is monopolized, inefficient, and government-owned,'' says Dr. Rabushka.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...