WE ORE
onivey s
Bar M G
that the currency is overvalued.
But the Bank of Israel is flat-
ly opposed to a devaluation, ar-
guing that given the current
(happy) state of full employment,
this will only trigger wage de-
mands, which will feed into price
inflation.
This happens to be true, and
the central bank's alternative
policy is to choke inflation
through high interest rates, de-
spite the risk that the side effect
of this will be to slow the whole
economy.
High shekel interest rates at-
tract intense criticism from the
business sector. They also attract
"hot money," especially from
abroad, and this inflow of foreign
currency depresses the exchange
rate and makes the shekel even
more overvalued, so that a vi-
cious circle is formed.
The fact that the central bank
cannot keep interest rates very
high for too long, because of their
damaging effect on overall eco-
nomic activity, means that the
"hot money" is constantly on the
alert for a change of policy, at
which point it will reverse direc-
tion and switch back from
shekels into foreign currency.
The Bank of Israel's hope is
that high interest rates will do
their job quickly before the pres-
sure to reduce them becomes
overwhelming and before the
speculators decide to exit from
the shekel in one rush.
The evidence suggests that the
gamble is not working, but the
bank is now in a classic mone-
tary trap:
If it holds rates too high too
long, it will trigger bankruptcies
and possibly a recession — but if
it cuts them, it will spark a run
on the currency, a forced deval-
uation and more inflation. ❑
SILVER COINS
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77—
Israel Chemicals
Is Purchased
The Israel Corporation has con-
cluded its $115.5 million pur-
chase of Israel Chemicals,
announcing it has reached a fi-
nancing agreement with Bank
Hapoalim.
According to the deal, Hapoal-
im will grant the Israel Corpo-
ration a $60 million loan.
To secure the agreement, the
Israel Corporation has pledged,
or mortgaged, shares.
Hapoalim stands ready to of-
fer the Israel Corporation further
financing of $54 million.
"The sale is complete at this
point," said Israel Corporation
secretary Yehoshua Neeman,
adding that Israel Corporation
head Shoul Eisenberg will take
over as chairman of ICL "within
the next few days."
Mr. Neeman said the Israel
Corporation now intends "to fur-
ther expand its business activi-
ties on the international market."
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