Damage Report

“The inevitable end of a protracted financial adventure.” That was how State Controller Yitzhak Tunik, the government ombudsman, described Israel’s bank- stock crash in a harsh report released last week. Tunik’s 107-page document concerned the financial turmoil of October 1983, when investors sold off shares of Israel’s major banks, forcing the government to shut down the Tel Aviv stock exchange for two weeks. By the time trading resumed, bank stocks had lost a third of their dollar value, and the government had pledged to buy the shares at precrash prices to keep investors from taking a beating. The collapse heightened an economic crisis that drove Israel’s inflation above 1000%, at an annual rate, last October and continues to threaten the country’s political stability.

After a year of investigation, Tunik blamed the banks for bringing on “a catastrophe for the economy” and faulted the government of former Prime Minister Menachem Begin for doing nothing to prevent the crash. The roots of the trouble go back more than a decade. In the early 1970s Israeli banks started buying and selling their own shares on the Tel Aviv exchange to help regulate the stock prices. In 1979 Israel’s inflation passed 100%, and the public bought bank stocks as a hedge against rising consumer prices. The banks encouraged this speculation and helped keep the bank-stock values climbing by dipping more heavily into the market to buy their own shares. As a result, bank-stock prices rose faster than inflation.

But in the process, the Tunik report concluded, the stocks’ value reached a level that was nearly three times the banks’ capital. Tunik said that the bankers’ strategy of buying shares amounted to “manipulative regulation” and helped send their prices to an artificial height and an inevitable fall. The report noted that Meir Heth, chairman of the stock-exchange board, predicted the collapse, but his warnings were ignored by the Israeli Treasury and the central bank.

Tunik estimated that by 1988 the government’s pledge to support the bank- stock prices will cost it at least $2.5 billion, a figure that is almost as much as the $2.6 billion in aid the U.S. plans to give Israel this year. The cost of the crash is a heavy burden for Prime Minister Shimon Peres, who is trying to cut the Israeli budget as a way of fighting inflation and reviving the country’s economy.

Last week’s report is only the beginning of the investigations of the bank- stock fiasco. Tunik accused no individuals by name, but called on the Knesset to appoint a full-scale commission to delve deeper into the financial disaster. Ha’aretz, a prominent Tel Aviv daily newspaper, demanded a probe “to determine who is responsible and to recommend steps to be taken against them.”