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Israel: Exposed, illiquid, lacking in depth

Government dominance of Israel's capital markets leaves state funding heavily exposed to outflows like the recent mass redemption of savings in provident funds. It has also hampered the development of corporate bonds. Funding locally through the stock exchange is problematic since concentration of ownership has rendered equities illiquid. Charles Piggott reports on proposals to reform the system

Israel's local markets are going through a rough period. During the past four months the Bank of Israel has had to intervene repeatedly in the market to support the price of government bonds. Research published by Bank Hapoalim on August 1 compared the central bank's action to US Federal Reserve Bank intervention to preserve the financial system's liquidity in the 1987 crash. Central bank interventions, under the government's safety-net action, have already exceeded IS1 billion ($305.8 million).

The stock market has also had a difficult ride. Since the beginning of this year the Mishtanin index of the 100 most liquid shares traded on the Tel Aviv Stock Exchange has fallen by 14.5%. Some Israeli investment funds have fallen by over 35%.

But jitters over Binyamin Netanyahu's recently formed coalition government and worries over a stalling Middle East peace process are not the only cause of the market's retreat. And, although the Tel Aviv Stock Exchange has been a popular destination for emerging market funds since Morgan Stanley included Israel in its index of emerging markets in March 1995, neither is it a foreign investor withdrawal that is bringing the market down.

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