Local banks announce millions of dollars worth of "exposure" to overseas credit meltdown.
By SHARON WROBELNY Mercantile Exchange 224.88(photo credit: AP)
Israeli investors and long-term savers will not be immune from the losses of the financial meltdown and collapse of financial institutions around the world, which could leave some savers less to retire on.
"Israel has become part of the global community and as a small and open economy we cannot be unaffected by the collapse of large investment banks around the world. We are all, in some form or other, invested in the financial world through our savings without knowing," Prof. Moshe Mandelbaum, former governor of the Bank of Israel and senior lecturer at the academic institute of Ashkelon said in an interview with The Jerusalem Post.
"Since the beginning of the year, public assets held in long-term savings such as pension and provident funds have lost about NIS 100 billion of their value amid continued volatility and sharp falls on worldwide stock markets resulting from the repercussions of the US subprime mortgage crisis. The latest collapse of Lehman Brothers Holdings will further reduce the value of the pension portfolio of the general public, which is partly invested in world markets."
The average pension savings portfolio in Israel had a 30 percent to 35% exposure to stocks in 2007. Taking these figures into account, the value of the average Israeli pension lost over 8% since the beginning of the year.
"The financial crisis is having its effects on long-term savers whose pension fund is heavily invested in stocks, and in particular on those approaching retirement age, which could be leaving them with less to retire on. Young pension savers over the age of 40 don't need to be in panic, since they still have another 25 years to make up for the losses when the market goes up again," said Gil Weissman, general manager of provident funds at Direct Investment House.
"There are solutions, which we offer for pension savings tracks according to age and life stages: the more time you have left to save, the greater the percentage of shares in your portfolio."
Weissman added that provident funds are probably losing between 3% to 5% a month.
Some local banks and financial institutions have already started to take stock and assess their exposure to the financial meltdown. Bank Hapoalim, which took the biggest write down on subprime-linked holdings of any Israeli bank, announced on Monday it had an exposure of $109 million linked to Lehman Brothers Holdings. The bank's exposure to Lehman Brothers products includes bonds, credit default swaps and derivatives. On Tuesday, Bank Leumi reported that the bank's exposure to Lehman Brothers products amounted to $88m., including bonds, derivatives and credit default swaps. Redeemed Certificates Leumi also holds about $56m. in bonds maturing between 2010 and 2014, $12m. of derivatives and $20m. of credit derivatives, the Tel Aviv-based company said in a statement today. It also has $100 million in certificates redeemed last week for which it expects to be paid for within the "the next few days."
In addition, Israel Discount Bank disclosed that its exposure to Lehman Brothers amounted to $57m. in senior debt and more from unspecified "liquid assets" that belong to Discount and are currently held by Lehman.
Meanwhile, the shekel gained about 1.9 percent against the dollar to 3.4932 at 6:38 p.m. Tuesday. The yield on the government's key Shahar bond declined to 5.46%, its lowest in five months.
The Bank of Israel said yesterday that its foreign currency reserves don't include any Lehman securities and that the extent of any loss from trading bonds through the failed US securities firm will probably be about $4m.
The central bank will post the loss only if transactions that it was conducting with Lehman in US government bonds aren't completed, it said.
"We have not yet seen all losses at local banks, there is more to come. However, the average citizen - who, for example, has an account at Bank Hapoalim - did not know that his money, managed by the bank, was exposed to Lehman Brothers or other high-risk investments such as mortgage-backed securities," said Prof. Aryeh Melnik, economics lecturer at the University of Haifa. "The lesson the average citizen can learn from this financial crisis is to be more aware and cautious about how and where to invest his money rather than count on banks or provident and mutual fund managers, who live of commissions, and are not supervised properly by the regulator."
In light of the financial crisis, Mandelbaum called for the Bank of Israel and its Supervisor of Banks to increase the supervision of banks in terms of their exposure to high-risk investments, salaries, bonuses and dividends.
"The collapse of Lehman Brothers Holdings is a warning that we are in the midst of a financial crisis but certainly not at the end of it.
"The real worry is not about Israel's financial strength but the long-term impact of a deep economic slowdown in the wake of the crisis," said Mandelbaum. "A slowing global economy will result in weaker exports and domestic demand, which in turn will reduce tax revenues and make it more difficult to balance the state budget. We need to be prepared for a slowdown in the economy, be cautious and take a defensive position regarding the state budget and family budgets and expenditure."
Bloomberg contributed to this report.
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