Overextended loans could cripple economy, state report warns

The concentration of bank loans in the hands of a few companies could seriously damage Israel’s economy if one of the firms were to default, a state report published Tuesday warned.

The State Comptroller’s report, delivered to Knesset Speaker Yuli Edelstein Tuesday morning, raises alarm bells over the amount of credit Israel’s top companies control in the capital markets and banks. The 900-plus page report also claims the state has failed in its oversight of private sector exploitation of the country’s natural resources.

Edelstein, upon receiving the report, said that the Knesset and its State Control Committee “will take care of things from here” and promised that the issues addressed in the report would be “thoroughly dealt with.”

The Comptroller’s Office has broad investigative powers and answers directly to the Knesset in annual reports on government operations.

Credit crunch

The report claims that the high level of concentration that characterizes  the Israeli economy — a quarter of registered companies belong to just 25 business conglomerates, while the largest 10 companies constitute 30 percent of the marketplace – can have disastrous effects on the economy should those firms run into trouble paying back loans.

According to the report, the biggest companies in the country are also its biggest borrowers.

“The level of concentration in the business sector creates systemic risk in the financial system, since the biggest companies are those that borrow the most from the credit market and the capital market,” the report states.

While the State Comptroller has dealt with the issue of economic concentration in the past, this is the first time it has tackled the concentration of loans taken by the largest companies and the risk the phenomenon poses to the broader economy, drawing a direct link to the fiscal crises in Iceland, Wall Street and elsewhere that kicked off the global economic downturn in 2008-9.

“The failure of a large lender or large group of lenders could cause substantial damage to the credit market and hurt the whole economy,” the report warns. “Thus there are companies that have the potential of being termed ‘too big to fail.’”

The report notes that the Comptroller’s Office will not involve itself in oversight on banks’ lending decisions, which are overseen by the Bank of Israel, but it does call on the state’s bank ombudsman to “impose stricter rules in in line with international standards, if it finds it right to do so.”

It also calls for a strategic plan to balance the needs of the country’s large firms with the economy’s need to insulate itself from any possible ill effects of a default.

A number of Israel’s largest firms have in the past few years forced investors to take a “haircut,” industry speak for a debt arrangement that lets the firm stay afloat without paying back all of its bondholders.

Recently, IDB Holdings and IDB Development, two of Israel’s largest firms, were forced to go to court to seek a debt restructuring plan which has yet to be approved. The two companies owe several billion shekels to stakeholders and any deal will likely send shock waves through the pyramids of companies they control.

Resource management

The report also finds that the state failed to properly manage licenses for natural resource exploitation, with multi-billion-shekel concerns expanding without enough thought given to sustainability.

The report claims that the state has lost out on “a large amount of money” by not applying sufficient oversight to the distribution of licenses for gas, oil, potash, sand, phosphates and gravel extraction.

“It is incumbent on the government to act to ensure that all citizens, and future generations, benefit from the nonrenewable natural resources of this country,” the report states. “The government has not done enough on this issue, and thus it is incumbent on it to develop income from the extraction of natural resources – especially those resources that from the start have not had royalties collected on them – in cooperation with the ministries involved, to ensure that these resources are distributed rationally and in accordance with just appropriation practices.”

The report also calls on the finance and energy ministries to create a system for collecting royalties on mined sand and gravel in order to avoid situations such as the recent difficulty in finding investors to exploit recent offshore gas finds due to uncertainty regarding the state’s share in the find.

After the finds of massive gas reserves in the Leviathan and Tamar fields, the state assembled a commission to study the issue and recommend what companies should pay for access to the gas.

A cabinet decision earlier this year to allow 40 percent of the gas to be exported brought large protests, and Australian firm Woodside is reportedly rethinking its involvement in exploiting Israeli gas fields because of the uncertainty.