1. Public confidence in the banking sector took a hit last week that will a least leave a scrape and, in the worst case, could leave a permanent scar. Israeli customers never suspected their bankers were worried about the customers best interests but at least they never worried about one thing: would the bank go bankrupt?

As of last week, that question is on the agenda. Despite the fact that Trade Bank is a marginal financial institution with less than 1% of Bank Hapoalim or Bank Leumi's assets ¿ the very fact that any bank in Israel could disappear overnight, rught under the Supervisor of Banks's nose, brings a new element into customers' considerations.

Bank of Israel's response to the bank's collapse has so far been stuttering. Just yesterday Supervisor of Banks Said conclusions must be reached, but the most original response came from Minister of Industry and Trade Dalia Itzik.

Itzik has worked recently to appoint Labor Party secretary general Raanan Cohen as chairman of the board at Industrial Development Bank, which is government-controlled.

Cohen's appointment is part of the establishment culture in Israel, in which politicians hep any friend at the end of his political career to find a cushy job with a NIS 50k to NIS monthly 100k salary.

Israelis call the ugly phenomenon "taking care of your own" which means cashing in your political power or public sector reputation for cold hard cash just as soon as your political options run out.

The job of Industrial Development Bank chairman has always been reserved for a crony. Previous chair Shlomo Borochov, a supported of the Yisrael b'Aliyah party, was appointed by previous trade minister Natan Sharansky and pocketed NIS 1 million in annual wages. Under Borochov's erstwhile leadership, the bank slipped into red ink and failed to meet capital adequacy requirements, leaving the job open for another politician.

But today, Cohen's appointment, after almost a lifetime in politics, with a PhD in Israeli Arabs and nothing like the faintest clue about banking, is particularly painful. Just one week ago, a small Israeli bank collapsed and we are already appointing for a bank ten times its size, a chair who probably doesn't know what assets and liabilities are, how to compute a minimum capital ratio or what a hedge transaction does.

If Itzik feels she must find a job for Cohen, she would do well to send him to a college, a museum, or a historical research center. Leave the banks to bankers.

2. Yesterday investment bank UBS Warburg published a macroeconomic analysis on Israel. Among other things, the bank writes that the 2002 budget deficit is expected to reach 5-6% of GDP.

UBS's prediction was received quite naturally by the capital market and the press, as a number of local economists have made similar projections in the past two weeks.

But we should take a moment to consider it. 5% to 6%? Just two weeks ago the Ministry of Finance submitted a new budget with a 3.9% deficit target. Not a week goes by and all the economists in Israel and abroad are completely apathetic about treasury projections?


In the past year, Ministry of Finance projections have become a joke in the eyes of the entire business sector. That's relatively weird considering it is the institution whose officials and economists have the most direct access to real time information on what is happening in the economy.

The damage to public confidence in treasury projections could carry no small price ¿ increased cost of capital, negative consumer and investor sentiment, and finally harm to Israel's sovereign credit rating.

But not everyone will have to wait to understand the damage: in a few days the provident, mutual and advanced training funds will start publishing their yields since the beginning of the year. Members, investors and savers will find out that all the profits posted last year de to the sharp drop in interest rates have evaporated this year.

The heavy losses in investment instruments were created by rapid shekel devaluation and investor flight from government bonds. The public's extreme change in preferences in the past two months mostly reflected fears the treasury was losing control of the budget and economic policy.

The next to pay the price for the damage to treasury credibility will be the business sector. After everything the sector has endured in the past two years, it will soon have to deal with rising interest rates.

When the public flees government bonds, their yields rise, and with them, bank lending rates and interest on the entire capital market. In this case the increasing price of capital is the cost of decreasing credibility.