European Sanctions Could Cripple Israeli Banks, Experts Warn

Former Supervisor of Banks, Yair Avidan, has warned that potential sanctions by European countries against Israeli companies and its banking system could have severe repercussions. Speaking to Ynet, Avidan explained that in an extreme scenario, sanctions could involve halting banking activities with major European banks. This could primarily harm trade relations between Israel and Europe, significantly impacting Israeli importers and exporters who are clients of the banking system.

Avidan elaborated that the financial risk to these clients could escalate, consequently increasing the financial risk within Israel's banking system. Industries reliant on trade or finance with Europe, or those with significant value chains linked to the continent, are particularly vulnerable. Such a blow to European trade could negatively affect Israel's GDP, productivity, and growth, potentially leading to widespread economic damage, including job losses, reduced household income, and increased financial defaults.

Another senior banker, speaking anonymously, described potential sanctions on the Israeli banking system by leading nations, including EU members, as a "real catastrophe." Banks currently have no direct means to address the issue, as it is being handled by the Israeli Ministry of Foreign Affairs and the government, with the banking system adhering to political decisions.

Credit rating agencies are closely monitoring the situation. Economists from these agencies have expressed grave concerns that damage to the Israeli economy has already begun due to sanctions on settlement products, and this could extend to major Israeli companies and increase the government deficit. However, the current assessment in Israel is that a credit rating downgrade is unlikely in the immediate future, with agencies awaiting the results of upcoming elections and the formation of a new government.

A senior economic official stressed that a further credit rating downgrade for Israel would significantly increase borrowing costs for the state, especially given war-related expenses. This could severely damage the state budget, prompt leading companies to reduce their operations in Israel, and negatively impact households. The official urged the government to take all possible actions to prevent such an outcome.