Bar-On's Rescue Plan for Corporations: A Cure or a Lethal Pill?

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Bar-On's Rescue Plan for Corporations: A Cure or a Lethal Pill?by Tzvi Ben Gedalyahu

(IsraelNN.com) Finance Minister Ronnie Bar-On (Kadima), stung by criticism of his $5 billion stimulus plan, rolled out a new $2.5 program to help boost corporate credit Tuesday. Several bankers fear he is treating the symptom and will make the problem even worse.

"Bankers expressed amazement at Bar-On's plan, saying it covers up the real problem of institutional over-investment."

However, investors showed their love for the idea of the government's guaranteeing credit for raising capital, and they bought heavily on the Tel Aviv Stock Exchange, raising major indices by four to eight percent.

Finance Minister Bar-On, who is a lawyer by occupation, said his program is aimed at solving basic problems in the financial system. In addition to government guarantees, he offered to set up investment funds for stock shareholders and to ease taxes to encourage money to flow in the stock market, possibly exempting foreign investors from taxes on bond interest and dividends.

The theory is that the injection of more credit will generate transactions of billions of dollars.

However, several bankers expressed amazement at Bar-On's plan, saying it covers up the real problem of institutional over-investment in the corporate sector. "Does the Finance Ministry think that we are going to start spreading around more credit and take more risks?" one banker told the Hebrew financial website TheMarker. "We do not need that."

The plan cast aside the immediate concern of Histadrut union leader Ofir Eini, who has demanded the government protect pension funds that have suffered losses in the past several months. The same funds enjoyed far greater profits since the economic boom began several years ago, when Likud chairman Binyamin Netanyahu was Finance Minister in the Sharon administration.

The emerging Finance Ministry plan will cost $2.5 billion and will cover only a small number of those also covered by the pension funds. It aims at those who are aged 60 and over and will guarantee savings only from the time the plan receives Knesset approval.

In another move, the Israel Securities Authority is setting up joint government and privately owned special funds to buy up low-priced corporate bonds.

While investors celebrated the new Bar-On plan, more economic statistics indicate that layoffs will drive up the unemployment rate. Economic growth in the third quarter of this year dropped to 2.3 percent and is expected to barely reach two percent next year. Exports dropped by 10 percent in the past quarter.

The Association of Electronics and Software Industries reported that 73 percent of companies plan to cut their payrolls by 10-15 percent and expect sales to fall by more than 10 percent under present conditions.

http://www.israelnationalnews.com/News/News.aspx/128551