Israel unlikely to be impacted by Dubai crisis

by Zhang Yanyang

JERUSALEM, Dec. 7 (Xinhua) -- The Dubai crisis should serve as an eye opener to countries that are too leveraged, said Israeli economists, noting that Israel's continued productivity in the high-tech sector, strict budget policy and banking regulation would mostly shield it from ongoing fluctuation in the world market.

"Those countries that took overly high leverage are going to suffer," Shlomo Maoz, chief economist at Excellence Nessuah told Xinhua, adding that there were many other overly leveraged markets which were likely to crash and lead to the continued fluctuation of the world market in the near future.

In Maoz's opinion, Dubai was only one example of the overly high leverage that some countries and firms assumed, and the banking system in Greece and Turkey as well as in Hungary and other countries in eastern Europe were also too leveraged, allowing for investments with little to no money down.

"As long as the key lending rate of the U.S. dollar is zero, the appetite for taking risk will increase. And companies will continue to take risk though it might come at a very high cost," Maoz said.

While the subprime mortgage crisis originated with home owners who were too leveraged as they had put little to no money down, thereby inflating the real estate sector, government policies aimed at stimulating the recovery from the financial crisis have also fueled the creation of bubbles.

In order to facilitate the recovery from the global crisis, many governments injected large amounts of money in the economy and cut interest rates in the hopes of increasing liquidity and consumer spending.

However, this "cheap money" fueled the creation of new bubbles as it is unclear how justified price levels are when the alternative is investment at zero interest, analysts said.

"I think what the world is learning is that risk premiums were reflecting a sort of bubble situation over the past few months that spread pretty much across the board," Jonathan Katz, an economist at HSBC told Xinhua.

"Sovereign and corporate spreads came down rapidly and Dubai is sort of an awakener in that countries have to be looked at separately and there is risk out there and perhaps more than we are factoring in," said Katz.

Katz noted that countries like Greece and Spain were among those who were considered problematic when it comes to their debt level. Those countries reacted negatively to what happened in Dubai because their own situation is also worrisome with a high debt increase of as much as 120 percent of GDP and a double-digit fiscal deficit.

The analysts said that Israel is recorded as a very save and defensive player in today's market, noting that investors differentiated the stronger emerging market economies from the more leveraged economies during times of financial turmoil and uncertainty.