This morning, after the fall of the economic plan in the Knesset and the firing of Shas ministers for voting against it, no small number of observers see the full half of the glass. "The prime minister displayed economic leadership in standing firm and firing Shas," some say. Others, including the left and economists, say "the economic plan was terrible and it's just as well it fell," while many others have a sense of a tempest in teacup "Shas will come down from their tree, the plan will pass and the crisis will end".
All those claims may be true, but they miss the point. What happened yesterday is another blow to the Israeli economy which suffers anyway from a long line troubles and risks. Because in the end, it doesn't matter how the politicians get themselves out of the mess they've made for themselves over ratifying the economic plan ¿ no good will come of it for the economy.
Will Shas come back? Will there be elections? Who will win? What will the Labor Party do? And what about Bibi and the Likud Central Committee? A million words will be written on those subjects, but one thing is already clear: the economic uncertainty level just rose. At midnight last night, some banks managed to react to the news and boost the dollar, which traded this morning around NIS 4.90, a 1% gain. In addition to the actual shekel fall, all the quantitative parameters that measure uncertainty also rose: the buy spreads in the currency market are twice the usual at an entire agora and the standards deviations on the options market are rising as well.
Not a single foreign investor will like what happened. It is unlikely that foreign economists and dealers will bother to analyze Interior Minister Eli Yishai¿s variety of considerations or what political weight is attached to Arieh Deri¿s impending release from prison. What foreigners will see is that, in addition to the Mideast crisis, the Israeli political system cannot manage to pass any economic plan. As bad and unsatisfactory as it may have been, the emergency economic plan was supposed to buy the government a little time, at least in the eyes of foreigners ¿ and now even that is in doubt.
Currency dealers in London and New York, who Bank of Israel this week called "the biggest speculators on the local market", have been selling dollars the past few days ¿ a trend likely to stop as they pass the morning foraging for buy opportunities. The economists at the ratings agencies are in a similar situation, just a week after they gave Accountant General Nir Gilad an extension to prove to them that the government can control the budget and the economy. We certainly wouldn't want to be in Gilad's shoes this morning when he receives the call from the manager of the Israeli desk at Standard & Poor's. A number of dealing room managers at local banks said this morning that there is a good chance to see the dollar at NIS 5 in the next two weeks.
Like the currency market, the stock exchange also doesn't like uncertainty, and political brouhahas are a sure-fire recipe for caution and sliding stocks. The Tel Aviv Stock Exchange is down just a tad this morning on assumptions the crisis will pass quickly with Shas giving in, but even if there is no major slide ¿ you won't find a reason for gains in this story.
And, most importantly, the economy. On Monday Bank of Israel governor David Klein will announce key lending rates for June, and if the state of the economic plan is not clear by then, he may be forced into hiking them even more than 1%. It is not unlikely that Klein will try to calm the markets, if need be, with a higher rate hike.
In October 1998, then-Bank of Israel governor Jacob Frenkel raised interest rates more than 4% in one month in order to deal with the crisis in Russia, so Klein certainly could make dramatic moves to deal with a more serious crisis right here at home. Such a move might calm the currency market, but would be tough on the economy, already suffering from a liquidity crunch, bad debt and credit problems.