Israel Enters Legal ‘Twilight Zone’ With Investors on Edge

(Bloomberg) — Investors and lawyers in Israel are weighing their next steps as they fret over a new law that weakens the power of judges and has deepened uncertainty for the country’s $520 billion economy.

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On Monday, despite widespread anger and hundreds of thousands of people taking to the streets in protest, Prime Minister Benjamin Netanyahu’s right-wing coalition barred judges from voiding ministerial decisions they consider “unreasonable.”

The shekel fell after the bill was easily passed in the Knesset, with opposition lawmakers boycotting the vote. The currency has weakened 1.7% to 3.70 per dollar this week, the worst performance among a basket of major units tracked by Bloomberg. Israeli stocks lost 2.2% on Monday and were down 1.95% in afternoon trading on Tuesday, recovering from a slump of as much as 2.66% earlier in the day. They’re still up 3.4% this year, but that’s far less than US equities or the MSCI World Index.

“We’re entering a twilight zone,” said Elah Alkalay, head of corporate responsibility at Tel Aviv’s IBI Investment House, one of 150 major companies that went on strike on Monday to express their opposition to the bill.

“The rules of the game should be fixed and clear. Now they will be at the mercy of politicians,” Alkalay said.

The government says the reasonableness law is just the first step. After the summer break, he wanted to increase the ability of politicians to select judges and make it harder for the Supreme Court to overturn legislation. All are steps, they say, aimed at increasing the voice of the majority that voted for this government.

The new law voiding reasonableness has already been sent to the Supreme Court for appeal. It often takes time before judges reveal their plans, but Israel’s judicial authority announced that a group of high court justices, led by President Esther Hayut, were cutting short an official visit to Germany to hold a hearing on the petitions.

Yuval Shany, a professor of law at Jerusalem’s Hebrew University, says it’s unlikely that the Supreme Court would strike down the new law since it is a so-called basic law. Instead, he thinks the judges will weigh in on how the law should function, perhaps suggesting limits. They probably won’t issue an injunction in the meantime, he said, meaning the law takes effect immediately.

“This could take months and the government will be free to conduct itself without the oversight that reasonableness has afforded until now,” said Yohanan Plesner, president of the nonprofit Israel Democracy Institute, which has opposed the law.

The government and its supporters say the courts have grown too powerful and are captured by the left. In particular, they say, reasonableness is subjective and therefore open to abuse.

Opponents, led by the professional classes who consider the courts a vital stopgap to populist actions, fear for the economy and Israel’s status as a magnet for tech investments.

The White House was also critical.

Protests Rumble

There were few protests on Tuesday. Still, some doctors went on strike and there’s little sign of the demonstrations — which have rocked the country since Netanyahu unveiled plans to overhaul the judiciary early this year — will abate anytime soon. Plans have been announced for a big protest on Saturday night.

Protest leaders paid for blacked-out full-page ads placed on top of several daily newspapers’ front pages in a spirit of mourning.

There is concern that Netanyahu is trying to appease the far-right parties he brought into his coalition when he took power in late 2022. Some protesters also say the law changes will help him fight charges of bribery and fraud, even though he denies that and charges himself.

Thousands of military reservists have threatened they’ll no longer volunteer for duty, with some saying they now question the country’s values. That’s alarmed the military leadership, coming at a time that tensions with Israel’s arch-foe Iran and its proxies are growing.

Netanyahu tried to placate opponents late on Monday, saying he was prepared to “discuss everything” and wait until November before trying to pass more legislation.

“Anyone who invests in a free market should be anxious now for Israel’s economy,” said Ranen Cohen-Orgad, co-chief executive officer of Leader Capital Markets, which joined in the strike. “Gatekeepers draw their strength from regulatory certainty.”

Israeli Assets Extend Slump as Investors Mull Judicial Bill

Yaniv Pagot, who heads trading at the Tel Aviv Stock Exchange, said he’s worried about Israel’s credit rating, which could stop the recent positive trend in the local bond market. Moody’s Investors Service rates the government’s debt A1, the fifth-highest level and well above junk territory.

“The next few days will be a test,” he said.

Not every investor is pessimistic. Michael Fertik, founder of Heroic Ventures and a Silicon Valley-based entrepreneur, said much of the reaction was hysteria.

“This is actually the best time to invest in Israeli startups,” he said. “There are two important things: the first is that Israel still has more great entrepreneurs than ever. The second is that when everyone is afraid, it’s the best time to invest. I am a Zionist but I invest in Israel because I’m a capitalist.”

–With assistance from Lisa Fleisher.

(Updates markets, add details on government plans, details throughout)

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