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Source: Reuters -
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A strike by Israel on Iran's nuclear facilities could trigger war with unforeseen consequences, testing the remarkable resilience displayed by Israeli markets during previous conflicts.
Israel's high-tech economy was unfazed by the 2003 invasion of Iraq, the 2006 war with Lebanon's Shi'ite Hezbollah militia and last winter's war on Hamas Islamists in the Gaza Strip.
"As long as we're looking at something short term ... that does not impact the economy as a whole from the long-term perspective, I think the markets factor it in and are already looking at the day after," said Jonathan Katz, macro-economic strategist at HSBC Tel Aviv.
The uncertainties are huge. A clash with Iran, which sponsors Arab and Palestinian forces north and south of Israel, might be limited in duration or set off violence lasting years.
The long Palestinian Intifada (uprising) of 2000-2005, when Israel was attacked by Palestinian suicide bombers and many died on both sides, had a "crushing" impact on growth, says Katz.
Unemployment in Israel rose to double-digits and the ratings agencies put Israel's debt on negative watch.
The picture over the past three years was far brighter.
Israel's $203 billion economy grew by 4.4% in the last quarter of 2009 its fastest in nearly 2 years. Israel forecasts 3.5% overall growth in 2010 - a rate analysts say is partly as a result of the Intifada dying out.
The calm has also benefited Palestinians in the occupied West Bank, where growth is estimated at 7-8% a year.
Katz says financiers aware of the Iran risk constantly ask him: "How long might it last? How far might it spread?
"It's really a tough call to make," he says.
"If it's a short-term conflict, let's say up to a month ... and the outcome is positive for Israel, if we can postpone the nuclear threat from Iran, then I think what we'll have at the end of the day, probably, is the markets moving higher".
Investors looking at recent conflicts find some reassurance.
The last time Israel was hit by long-range missiles was in the Gulf War of 1991, when a U.S.-led coalition acted after Iraq's invasion of Kuwait.
There was an overt, six-month military build-up ahead of the six-week conflict. Gas-masks were distributed in Israel and the agitation precipitated a Tel Aviv market sell-off. But Israel kept out of the war and although its cities were targeted by 39 Iraqi Scud missiles, Saddam had no mass-destruction warheads and only one Israeli was killed. Markets rapidly recovered.
Innovative technology, bioscience
In 2003, investors held on as US forces toppled Saddam Hussein, removing his government in five weeks, ultimately at a huge cost to Iraq itself and to Washington's coffers.
The TA-25 climbed from 340 to 384, the shekel from 4.747 to 4.52 against the dollar on the day then President George Bush declared "Mission Accomplished".
With Lebanon and Gaza, the shekel was barely affected.
The bills for both, in infrastructure and environmental damage, were heavy - some $3.5 billion for Israel in 2006 and $5.0 billion for Lebanon. Gaza rebuilding will cost at least $2 billion. The bill for Israel's offensive is about $1.5 billion.
The Lebanon war brought a 34-day shutdown of industry in the north, depressing GDP by 0.9%. The Gaza war hit farming in the south, but never seriously threatened industry.
There was no significant flight of capital from Israel and no shekel currency collapse during either conflict. Three life science companies were bought up for about $1 billion total in the two months after the Gaza war ended.
Israel's innovative technology and bioscience sectors are a magnet for global companies such as Intel, Microsoft, Motorola, Google, Applied Materials, HP, Deutsche Telekom and Samsung.
Corporations investing in Israel know "it's the Middle East", says Katz. "No one is bolting for the door."
Nevertheless, the political and security unpredictability around Israel does drive up the cost of doing business there, as well as its own credit rating and borrowing costs.
"One of the reasons Israel is rated where it is, in the middle of the A category, is geopolitical risk," says Richard Fox, head of Middle East and Africa Sovereign Ratings at Fitch.
"It's a fact that volatility has costs on the fiscal side. The problem with Iran is that it is uncharted territory. There are lots of scenarios you can envisage."
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