Israel’s credit rating

John Donne: no economy is an island entire of itself; every economy is a piece of the intercontinental totality, a part of the main.

By JPOST EDITORIAL
European Union leaders Sarkozy, Merkel 311 (R) (photo credit: REUTERS/Thierry Roge)
European Union leaders Sarkozy, Merkel 311 (R)
(photo credit: REUTERS/Thierry Roge)
Financial markets everywhere are volatile and jittery, America’s credit rating was downgraded by Standard & Poor’s last week from a perfect AAA to AA+, the European Central Bank is buying Italian and Spanish bonds to avert the Greek scenario and Greece, Portugal and Ireland still weigh down the EU.
Israel’s credit rating, incidentally, was left unchanged at A, along with a solid forecast. But can we calmly observe all that turbulence and feel smug? No way. Nowadays – to paraphrase poet John Donne – no economy is an island entire of itself; every economy is a piece of the intercontinental totality, a part of the main. Therefore, when paroxysmal attacks of whatever origin afflict other economies, particularly the pivotal ones, no other economy can plausibly expect to remain unaffected. That also goes for Israel, which prides itself on having escaped the worst of the 2008 upheaval. But that pride, though partly justified, isn’t the whole story.
The credit crunch of just a few years ago left a very uncertain world. When all other economies had to cut their interest rates to rock-bottom, we had to follow suit (even if we subsequently raised them somewhat, though not to their previous levels). Unprecedentedly low interest rates made mortgages attractive – but not just for first-time home buyers. They enticed investors too, and the spiked demands hiked prices. The housing bubble became engorged and, to some extent, spawned the frustration of many Israelis attempting to gain a foothold on the real-estate ladder – a factor which made tent-protests all the rage in recent weeks.
No, Israel didn’t completely avoid the 2008 crisis. The grotesquely overvalued shekel, which threatens our export earnings, is but another undesirable development skewing our economy and leaving us more vulnerable than most laymen realize. Things aren’t brilliant here despite the superficial impression that we can afford to loosen our collective purse-strings and splurge on spendthrift welfare programs.
Whatever success Israel did have in avoiding the nastiest effects of 2008 was incontrovertibly due to the fact that it maintained budget constraints and abstained from fiscal irresponsibility. That wasn’t easy. Any politician’s knee-jerk inclination is to please the public, often with outlays of cash for whatever one’s electorate covets. Prudence isn’t popular. The facile populist prescription is to let the masses have what they are clamoring for.
Given the media-hyped tent-protest vogue, with its derivative variety of campaigns for a bewildering array of socioeconomic causes, the temptation must be great in high places to throw caution to the winds. Whatever the government’s social-change taskforce might recommend, it’ll most likely relax fiscal restraints.
In normal times this may be a tolerable sacrifice, but these aren’t normal times. Besides the latent long-range dangers, there are already immediate ramifications to even a perceived predisposition for fiscal largesse. Warnings are already being sounded that Israel’s bond market is threatened, thereby weakening Israel’s monetary position.
America’s problems impact on the values of Israel bonds, on those Israeli equities also traded in America, and especially on commerce. If Israeli exports suffer, it might lead to higher unemployment here. Risk-aversion is already evident, ushering in, perhaps, another credit crunch. Against this background, the tent protests are contributing crucially to negative vibes, in a situation where it’s exceedingly easy to tip the delicate balance.
In global terms, the 2008 crisis was never “cured.” It merely reacted well to palliative care. But a relapse cannot be ruled out. Indeed, it may be imminent. We can’t say for sure that the globalized marketplace isn’t heading for a dire downturn, if not actually a strangulating worldwide recession. Doomsday prophesies might be off the mark – but so is the welfare-first advocacy. We need to remember that what triggered the American downgrade was gargantuan overspending, part of it as a temporarily soothing sedative for the acute ills of 2008.
What’s more, America is by no means the only economy that has overextended itself. France, despite its AAA rating, isn’t much better off. Gross fiscal irresponsibility created the massive Greek debt burden, borne mostly by Germany. It would be easy to slide down a Greece-like slippery slope. And once a decline begins, it’s very hard to stop. Moreover, unlike Greece, Israel has no patron economic union to prop it up.