European Sanctions Could Devastate Israeli Banks and Economy, Official Warns

European and British sanctions could severely impact Israeli banks and the broader economy, Yair Avidan, inspector of the banking system at the Bank of Israel, warned on Monday, September 28. Avidan expressed uncertainty about the scope and application of these sanctions, noting that an "extreme scenario" could lead to the cessation of cooperation between Israeli financial institutions and major European banks. This would primarily affect Israel's trade with Europe, causing a sharp reduction in business for importers and exporters who rely on banking services. The increased financial risk for these businesses could trigger a chain reaction, elevating risk across the entire banking system.

Avidan elaborated that any sector dependent on trade and banking finance with Europe would suffer significant damage. A decline in trade volume with European countries would negatively impact Israel's gross national product and economic growth rate. The consequences for ordinary citizens could include increased unemployment and reduced real incomes, while banks might tighten lending conditions to mitigate their own risk. A senior anonymous banking official described the potential impact from leading European states as a "catastrophe."

Israeli banks are unable to take preemptive measures against potential damage, with the political leadership and the Ministry of Foreign Affairs responsible for assessing consequences and developing responses. Private banks must adhere to government decisions. International credit rating agencies are closely monitoring the implementation of existing sanctions and the preparation of new ones. Israeli representatives have conveyed concerns to these agencies about the damage already inflicted on the economy, particularly concerning products from Judea and Samaria, with potential spillover to major Israeli companies, indirectly increasing the budget deficit.

Despite these concerns, Israel anticipates its credit rating will remain stable. Agencies are awaiting the results of the October 27 Knesset elections and the formation of a new government. A senior Israeli economic official stated that a credit rating downgrade would immediately increase interest rates on government loans for ongoing military operations, straining the state budget and prompting international companies to reduce their Israeli operations, ultimately affecting all households. This official urged the government to take immediate steps to avert such an outcome.

The Bank of Israel commented that the actual scenario depends on foreign leaders' specific statements. The bank maintains contact with commercial banks and will address issues as they arise, acknowledging the foreign policy dimension managed by relevant government bodies.