Netanyahu tries to avert crisis as economic indicators falter

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JERUSALEM — After vowing during last week's trip to the United States that he would revitalize Israel's economy, Prime Minister Benjamin Netanyahu faced his first crisis, over the economy.

Netanyahu summoned the governor of the Bank of Israel for urgent consultations about a growing crisis in the nation's stock and capital markets.

Monday's meeting between Netanyahu and central bank Gov. Jacob Frenkel took place as share prices on the Tel Aviv Stock Market plunged by more than 3 percent for the day to an eight-month low.

Investors' fears about the future course of the peace process and regional stability have prompted the market to lose more than 10 percent of its value since Netanyahu's victory in the May 29 national elections.

In addition, a record number of Israelis cashing in their low-interest provident funds have forced banks to begin reconsidering their mortgage policies.

The provident funds were created to enable employees and employers to make long-term deposits in nontaxable savings plans. The money is invested primarily in savings bonds that were originally assured competitive interest rates by the government.

But since the government's decision several years ago to stop guaranteeing the interest rates, the funds have earned relatively low rates. Israelis have instead opted to cash in the plans and invest in short-term savings plans, or in bonds, which are offering the highest yields in 10 years.

Israelis reportedly liquidated some $1.4 billion from the provident funds during the first six months of the year. These liquidations have had serious repercussions on the nation's banks, which use the provident funds to capitalize mortgages they issue.

The rush to liquidate the funds has forced the banks to reduce the number of mortgages they grant and may also lead to increased lending rates.

Further upward pressure on interest rates came with Monday's release of the June figures for the cost-of-living index, which rose 0.7 percent for the month. The main factor in the rise was a continuing increase in housing costs. The rise was offset somewhat by a drop in fruit and vegetable prices.

The rate of inflation for the first half of the year now stands at 7 percent, and the projected rate of inflation for the year may rise into the double digits.

Rising interest rates as a result of inflationary pressures could in turn have further adverse effects on the stock market and on rates for housing and other loans.

Netanyahu attempted to quell investors' fears this week by saying the markets would eventually reflect the positive effects of his plans for privatization and government spending cuts.

Netanyahu, meanwhile, survived four no-confidence motions against him because of economic issues.

Labor, along with leftist parties Meretz, Hadash, and the Democratic Arab Party tried to unseat Netanyahu over the government's proposed budget cuts, which opponents charged would hurt the poor.

"I reached the conclusion that the main target is children," MK Yossi Sarid of Meretz said.

The opposition also charged that the cabinet had approved the cuts with undue haste.

Netanyahu coalition MKs who responded to the motions were often equally critical of both the plan's content and the rapidity with which it was developed.

Finance Minister Dan Meridor noted that proposals virtually identical to those he submitted were included in a 100-day plan prepared by Labor's Yossi Beilin in the event of a Labor victory.

"The people will judge, in the 2000 elections, what kind of economy we found and what kind of economy we delivered to them four years later," Meridor said.