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(photo credit: Bloomberg)
Following a four-day holiday, Tel Aviv stocks opened with sharp losses on Sunday, but staged a relative recovery in late trading as the Finance Ministry said it was committed to restoring the public's confidence in the financial system.
"The government of Israel will take care of the financial system out of concern for the public and its savings. In cooperation with the Bank of Israel, we will emerge from this crisis," Finance Minister Ronnie Bar-On said at the weekly cabinet meeting on Sunday. "We know what needs to be done, and we will do everything to stand behind the stability of the financial system. For the past 60 years, depositors have not been harmed, and they won't be harmed now."
While pressure heightened on the world's leading economies over the weekend to detail specific urgent and exceptional steps to stabilize financial markets before they open on Monday, the Finance Ministry and the government are not rushing to take such steps.
Although Bar-On said that intervention in the financial markets was an option that was not being ruled out, he warned that early intervention might cause more damage rather than aid the markets and investors.
"We are still in the midst of the global financial crisis, and it's already clear that this is a crisis of historic dimensions. However, the economic and financial reality in Israel is different. There are currently no fears of any local bank collapsing," said Bar-On. "The financial system, especially the banking system, operated more conservatively. It barely adopted the sophisticated financial instruments that other systems are now suffering from. Our system was kept under control, through tight regulatory rules, high capital adequacy ratios, and high levels of disclosure and transparency. As a result we are in a situation in which the financial system's level of exposure is fairly limited."
As global stock markets embarked on their roller coaster ride last week, prompted by panic selling sweeping many markets to their steepest falls ever as investors dismissed moves by governments and central banks to calm things, pressure mounted on the reopening of the local stock exchange on Sunday after a four-day break for Yom Kippur.
Trading on the Tel Aviv Stock Exchange opened with sharp losses, as local stocks plunged over 8 percent after a delay of nearly an hour as pressure of preliminary orders pushed the Tel-Aviv 25 Index down more than 5%. Under the TASE's "English opening" policy, if the index points to drops of more than 5% at the opening, trading is postponed for up to 45 minutes. Automatic circuit-breaker rules will activate if the index changes by more than 8% during the session. If the index falls by 12%, trading is suspended for the day.
Following the Finance Ministry's announcement that it would stand firmly behind the financial system, the TA-25 Index cut early losses and closed down 3.8% at 767.6 points. The Tel Aviv 100 Index was down 4.6% to 683.5 points. The Tel Tech Index was down 11.8% to 150 points, and the Tel Bond 20 was up 0.3% to 199 points, recovering from a loss of over 3% earlier in the day.
"The market has reacted remarkably on the first day local investors had a chance to respond to last week's tumbling stock markets across the globe. There was a lot of panic and hysteria ahead of the opening - all psychological in nature - and we expected sharper losses," Yair Alek, CEO of Axioma Investment House, told The Jerusalem Post in a telephone interview. "Today is a proof that without an economic bail-out plan or other interventionist plan, the local market functioned properly, closing with modest drops."
The TASE will close Monday for the Succot holiday and remain closed for trading until Wednesday.
"What happens in the global markets over the next few days will dictate the direction of the local market on Wednesday," said Alek. "As international government leaders are gathering to formulate new steps in an effort to combat the credit freeze, we could see some upside on global markets, in the form of a correction."
While the Finance Ministry and the Bank of Israel reiterated that they were not yet rushing to take direct operational steps to secure the public's invested funds, Industry, Trade and Labor Minister Eli Yishai called upon the government on Sunday to adopt an economic rescue plan in the wake of the global market crisis and a serious loss of public confidence.
Yishai's proposed plan includes a government safety net to insure all the public's deposits in banks, mutual funds, provident funds, and advanced training. Yishai contends that the measure will help restore the public's confidence in financial institutions and prevent a capital outflow that could exacerbate the liquidity crisis in the economy.
"If you look at deposit insurance around the world, you see that governments can't meet the insurance programs. In a situation of a general crisis as there is now, it turns out that deposit insurance is never high enough and at the end of the day is just a bureaucratic plan," said Bank of Israel Governor Prof. Stanley Fischer in an interview on Channel 10. "I have deposits in the bank, and I am not worried about them. When crises happened in recent years in Israel, the government and the Bank of Israel intervened, and people did not lose all their deposits."
Regarding the banks, Yishai's plan demands an increase in the banks' capital base by at least NIS 10 billion through an issue of more share capital. This, in turn, will work to raise the public's confidence in the banks and provide more capital for the banks' activity - especially in credit activity - to boost economic activity.
In a move to avert future erosion of pensions and savers' future incomes, Yishai proposed an expansion of pension funds' mandatory investment in Consumer Price Index (CPI)-linked government bonds from the current 30% to at least 50%, which would increase investors' confidence in pension funds.