People are already toasting the Jewish New Year of 5763. Managers throughout the troubled marketplace will be trying to cheer up their worried workers by chanting encouraging slogans. The usual theme is that the worst is behind us.

If challenged to explain their optimism, they'll probably shrug: Well, it couldn't get worse.

Sounds sensible. After two dreadful years, in which many nations including Israel felt their security tottering and their pockets emptying, doesn't it sound reasonable that a third year of retreat is unlikely?

That was also the theme on Wall Street in late 2001, and in early 2002. The market has not eroded for three years straight for sixty years, the experts declared.

Yet 2002 is two-thirds over and the markets are still seriously low.

Things can always get worse. The problem is that we aren't talking about a theoretical possibility: there are plenty of factors that could make 5763 an even worse year, from the economic-financial perspective.

• The domestic security situation need we elaborate?

• The regional security situation i.e., Iraq ditto.

• The global economy there is real danger that growth will be small, even negative. A war in Iraq would not help.

• The domestic economy continuing to impose restrictive monetary policy together with contractionary fiscal policy are a sure recipe for making the recession worse. Regarding the chances of exports driving growth see "The global economy", above.

• The domestic economic crisis there is also real peril in the other direction, namely that monetary policy could fail (as opposed to a controlled shift to a different mix of policy components). Under that scenario, in which the budget gets rejected by Knesset, the government falls and new elections are held an acute crisis of confidence could arise, leading to financial and economic crisis.

• The banking crisis could spread This is one of the nightmare scenarios for Israel, that the banks evince signs of weakness, including accrual bad debts built up throughout the recession and never handled firmly, added to new debts as businesses suffer. Meanwhile, goes the scenario, foreign investors pull out their forex deposits. Confidence in the banks fades and instead of a rally next year, we'd see further deterioration of companies and households alike.

The important thing isn't what the managements say when lifting their glasses to the New Year. Such ceremonies are supposed to be inspiring, to focus on the bright side. And there are figures indicating stabilization and even improvement in some areas.

The important thing is what's said behind closed doors, when the managers are alone, what's said at investment committees of institutional investors. Are they still focusing on minutae such as fluctuations of a percent or two in the shekel? Or on the Bank of Israel decision to tweak the rates by a fraction of a point? Or perhaps they are relating to the harsh reality more soberly and are preparing for the future, which will evidently entail great changes?

It is uncomfortable emotionally and professionally to deal with extreme scenarios. But that is what the circumstances demand. Take the exchange rate, for instance. Forex players prefer to assume that the Bank of Israel will keep the shekel stable. Then, when discussing parameters such as the shekel's rise in value to NIS 4.5 to the dollar, or drop to NIS 4.9, it is easier to quantify the effect on sales, and on the investment portfolio.

It is much harder to evaluate the effect on the real operations of companies, or on the portfolio structure of investment institutions, if confidence in the shekel is shaken, and the exchange rate plunges by 20% to 30%. If that happens, say while Iraq attacks Israel with missiles, or due to the dollars collapse on a "double recession" in the United States planning becomes that much tougher. Yet it is that much more essential.

The crisis of confidence on the government derived partly from the feeling that the ministries and Bank of Israel refuse to countenance such possible horror scenarios. But what about investment institutions pension funds, provident funds, insurance companies, who handle most of the public's money?

In the past such questions were pointless, because institutional investors had no say in routing their investments. They did not have the financial tools to manipulate their exposure and risk levels. That is not the case now. Even institutions whose assets are mostly mired down in government bonds, or stocks traded on the Tel Aviv Stock Exchange (meaning, in non-negotiable assets, for all intents and purposes) can construct and implement strategies to provide maximum protection when the markets are sharply changing, with the help of derivatives.

Since they can, under the circumstances, they must. They absolutely may not apologize in a year's time that "such a scenario was unthinkable" or that they "had seen the danger, but couldn't to a thing to protect the assets".

Nor should they focus solely on the negative scenarios. When the rally arrives in Israel, it will almost certainly not be gradual. The boom will arrive with a bang. True, missing an opportunity is not usually considered as grave a sin as causing heavy losses. But it derives from the same syndrome: fossilized thought and a failure to plan and prepare.

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