Debt isn't just something for America and Europe to worry about, the chairman of the Israel Stock Exchange Authority, Professor Shmuel Hauser, said at a conference Thursday. Despite the current strength of the Israeli economy – and that strength was substantial, he said – there are dark clouds on the horizon, because of the weakening world economy and because of local problems surrounding corporate dept. Now is the time for officials, executives, and investors to get their respective houses in order, he told a meeting of investment house officials in Tel Aviv Thursday morning.
Unlike other places, Hauser said, Israel's debt to GDP ratio was relatively low, its unemployment rate is – and has for a long time been – relatively low as well, and the Bank of Israel has access to fiscal tools (such as cutting interest rates even further) if necessary. With that, he warned, “the financial threats from within, and especially from outside Israel, require us to be ready for unfortunate developments.”
One problem, he said, was corporate debt, which would require many debt restructuring deals, especially among large companies, in the coming months. The number of companies in financial trouble has shot up since the financial crisis of 2008, he said. In 2008, there were two debt restructuring deals in the Israeli economy; in 2009 there were 38, while so far this year there have been 29, worth NIS 4.5 billion.
And the debt problem was getting worse, he said. “If a 15% yield on a corporate bond represents a strong possibility that a corporation will be unable to pay its debt – hence the high interest rate for loans – there are about NIS 20 billion of such bonds in the current NIS 300 billion active bond market. Just six months ago, there were only NIS 4 billion of bonds with yields like that,” indicating that the fears of bankruptcy among investors has grown for many large corporations.
Hauser suggested that investors take at least the same level of interest in these developments – which would be bad for the entire economy if they continued – as consumers did in the price of cottage cheese last summer. “Why does the objective of knocking a few agurot off the price of cottage cheese lead to mass protests, while the selling of high-risk bonds, that may indicate that a company is going bankrupt and may even lead to that eventuality, not mobilize investors to take at least the same interest in how companies decide to issue bonds as consumers have an interest in cottage cheese,” Hauser asked.