TASE down on Europe debt crisis jitters

By SHARON WROBEL
May 9, 2010 23:06

Steinitz: Greece’s debt crisis shouldn’t have much of an effect on Israel at this point, due to its "restrained" economic policies.

4 minute read.



Finance Minister Yuval Steinitz.

steinitz 311. (photo credit: Ariel Jerozolimski)

The global market meltdown at the end of last week sent local stocks to a three-month low on fears that the sparks of the debt crisis in Greece will spread to the rest of Europe.

Finance Minister Yuval Steinitz said on Sunday that Greece’s debt crisis shouldn’t have much of an effect on Israel at this point because of its “restrained” economic policies and conservative banking sector.

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“Israel’s exposure to Greece is limited. Our trade connections to Greece are minimal, and commercial relations with Portugal and Ireland are also not substantial,” Steinitz said in an interview with Army Radio from China, where he is leading a delegation of ministry officials and businessmen.

“However, Israel has stronger economic ties with Spain and Italy, and if the crisis spreads there the danger is larger. Hence, if a pan-European crisis breaks out, it could affect us. But our economy has shown in the recent crisis [the global financial crisis] that it can cope better than other countries, while managing to remain in good shape without having to greatly increase deficits and debt-to-GDP ratios as other countries have,” he said.

The Tel Aviv-25 Index on Sunday fell the most since the beginning of February, down 2 percent in intraday trading after plunging more than 3% at the opening of the market. The benchmark index was down 1.1% at the close, at 1,128.1 points. The TA-100 Index declined by 0.9%, to 1,058.7 points.

Stock losses “were expected following the collapse in the global markets,” said Yaron Fridman, equity strategist at Bank Hapoalim Ltd. in Tel Aviv. “There is no reason for long-term declines as they stem from the global retreats and not from real economic reasons, as the Israeli economy is strong and companies’ performances should continue to be strong.”

Panic selling sent global markets plunging at the end of last week. US stocks fell the most in 14 months on Friday, with the Standard & Poor’s 500 Index erasing 2010 gains amid concern a €110 billion rescue package for Greece won’t be enough to keep Europe’s most indebted nations from defaulting. Moody’s Investors Service said on Thursday that banks in Portugal, Spain, Italy, Ireland and the UK could be at risk as the threat of contagion grows.

On Thursday, the Dow Jones Industrial Average posted its biggest intraday loss since the market crash of 1987, the euro slid to a 14-month low and yields on Greek, Spanish and Italian bonds surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. The Dow average lost as much as 998.5 points, or 9.2%, before paring its drop to 383.17 points later in the afternoon.

“It is very difficult to see these problems being resolved either quickly or smoothly because all involve serious political issues. It is worth noting that the eurozone has continued to have some robust numbers, but the Greek problems are likely to knock confidence, among both households and businesses in the eurozone and with investors,” said Paul Robinson, analyst at Barclays Capital.

“In our view, without external help, Greece cannot repay its debt – it is effectively insolvent. We do not think the same about the other economies involved. Instead, it appears that the market is trading on the assumption of contagion from Greece to them.” Robinson said.

Despite the news that Greece’s parliament approved austerity measures demanded by the European Union and International Monetary Fund as a condition of its bailout, the crisis intensified at the end of last week, moving the euro-dollar exchange rate below 1.30.

“We had expected the announcement of the Greek deal to lead to a short-term bounce for the euro, but this proved optimistic. The measures contained in the austerity package are very onerous indeed, and it seems quite plausible that the Greek government will not be able to pass the Economic Policy Program package as it currently stands by the deadline at the end of June,” said Robinson. “Even if the package is passed and – somehow – the spending cuts take place, we think the growth forecasts are too optimistic.”

In the short run, Robinson said the euro is likely to continue to weaken.

“Beyond three months, we expect the euro to recover somewhat. There remain significant questions facing the US economy despite the recovery,” he said. “It has as worrying an overall fiscal position as the eurozone and while it has a less complicated political structure, it may also be very difficult to address.”

Barclays Capital updated its forecast for the euro-dollar exchange rate to 1.20, 1.20, 1.25 and 1.25 in one, three, six and 12 months.

Fears of an escalating crisis in Europe have also triggered concerns among Israeli manufacturers and exporters.

“Israeli exporters are very much exposed to the crisis in Europe,” said Shraga Brosh, president of the Israel Manufacturers Association. “Almost a third of Israeli exports are in euros, which are currently 20% below the level at the beginning of the year, and in addition, in the past two years, due to the dollar crisis, we switched much of our focus on trade with eurozone countries.”

Brosh added that if the crisis in Europe deteriorates, the growth forecast for the economy will need to be revised downward.

Bloomberg contributed to this report.


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