“The credit currently extended to Israeli diamantaires totals at about 1.4 billion dollars - 40% less than the credit level in September 2008. This credit crunch was excellent when we were working to halt the crisis in early 2009, but now it puts us at risk. An infusion of funds into the system is essential to our ability to compete worldwide. The solution lies in the banks' recognition of rough import as collateral for new credit,” Avi Paz, President of the Israel Diamond Exchange, says in his article posted on www.israelidiamond.co.il.
However you look at it, he goes on, the level of credit currently provided the Israeli diamond industry is too low, and ultimately this will prevent us from meeting the challenges we face. In order to maintain our position as one of the world's leading diamond centers, we must ensure that new money is injected into the system.
It is important to remember that we are not acting alone in the international arena. We have tough competition from other diamond centers, which are always trying to outdo us. The year 2009 ended with encouraging growth figures relative to the period that began with the emergence of a global crisis in September 2008. After long months of an almost total cessation of trade, the second half of 2009 showed the first signs of recovery in the industry.
It may be a slow and gradual recovery, but the figures for the first months of 2010 indicate a steady trend. If there are no surprises, we can expect the recovery to continue throughout the year, and hope that by the end of 2010, the color will have returned to the cheeks of the Israeli diamond industry.
However, we mustn't forget that just a year ago our industry came to a near standstill. The gradual recovery from the crisis is the result of a combination course, improvement in the world economy, as well as the careful, healthy conduct of the industry and the diamantaires during those challenging times.
As an interim summary, we can now say confidently that we managed to ride the storm of the crisis fairly well. One important indication of this was the ability of diamantaires to dramatically and swiftly cut back their bank debts. Today our debts to the bank total just about 1.4 billion 40% less than when we entered the crisis.
The considerable shrinkage of credit effectively enhanced the flexibility and financial resilience of the Israeli diamantaires. However, now that the struggle to halt the crisis is behind us and we need to resume regular activity, this figure is cause for concern. The present level of credit means almost no new money is entering the system, and as a result, our part in the worldwide recovery is currently weaker than what it could and should be.
One could say that the industry's credit level has reached the red-alert level. In order to compete with the other major diamond centers we need to ensure that it rises as quickly as possible above the danger point - 2 billion dollars.
Before the Crisis
To better understand what is happening in the world diamond industry and why we need more credit, we should look back for a moment to those "prehistoric" times before the outbreak of the great crisis in September 2008.
Until then, the three leading diamond centers -Israel, Belgium and India -were more or less on equal ground. Each had its relative strong points (India as a cutting center, Israel as an international trade center and Belgium as a rough center), but in terms of scope of activity, there were no great differences among them.
The global economic crisis reshuffled the cards, creating new rules of the game in the world economy and the international diamond industry. We all know that such a great upheaval as that of the last 18 months can create significant opportunities as well as changes. The main questions we need to ask ourselves now are - What are the new rules of the game? What are our relative strengths in the newly emerging arena and how can we take advantage of them? And, of course -Where do we stand now that the crisis is over?
At present, it seems that the other diamond industries are picking themselves up faster than we are. Naturally, that doesn't necessarily mean that this will continue to be the case. Nevertheless, in our effort to reverse the trend it is essential to examine the current situation.
One of the main reasons that the other diamond centers seem to be recovering more quickly is that during the world crisis they enjoyed extraordinary support from their governments and banking systems. This was expressed mainly in government-guaranteed credit, which meant that the industries in those countries did not have to make drastic reductions in their level of credit.
To our deep regret, unlike our colleagues, we received only sympathy and praise from our government; it did not offer any tangible aid. Perhaps this is the time and place to say that we were disappointed. Yes, we expected our government to recognize and value the contribution of our industry to the national economy and we thought it appropriate to make real assistance available to us. Unfortunately that did not happen. One of the most important lessons we learned from this crisis is that the solution always lies with us. Thus the struggle of our colleagues overseas during the crisis seemed completely different to that of the Israeli diamantaires while we fought to reduce our credit, they were busy preparing for the day after, increasing their share of rough and polished and strengthening their centers. After all they had something we lacked - access to liquid means of payment.
The Solution
Now, contrary to the situation at the height of the crisis, the banks that finance the industry are ready to open up their coffers and increase our credit lines. This is expressed at every meeting between the industry leaders and the bank directors.
"We are prepared to increase your credit - just come and take it," they say. Indeed, it is no surprise that the banks want to enlarge our credit line now. After all, we proved extraordinary stability during an almost impossible period. Now the banks, which make good money by providing us credit, also understand that they have no reason to worry. One might say that now they have overcome the shock of the global crisis they want to get back to "business as usual," and for them this means giving us more credit.
Increasing the credit of the diamond industry and those involved in it is undoubtedly in the interest of all parties, so why isn't it happening?
In my view, one of the main obstacles lies in the type of collateral the banks are demanding in order to increase our credit. The banks need to understand that one of the implications of the global economic crisis is the need for deep change in the area of collateral. They must consider the new situation and adapt as necessary, to create the right conditions for us to take more credit.
The collateral that the banks have demanded until now was divided into four categories:
1. Hard collateral - land, offices and property;
2. Export - the banks recognized the diamantaires' export to traditional markets and longstanding foreign companies as collateral - however, in the wake of the crisis, a considerable portion of our export activity is directed at developing markets such as China, Hong Kong and India, through the offices of the Israeli diamantaires, and it is harder for the banks to recognize this activity as collateral;
3. Deposit of polished diamonds -The deposit of diamonds in the bank as collateral is a solution that hinders the quick rollover of trade in the industry;
4. Postdated checks - internal trade enabled the extension of credit based on the deposit of postdated checks, but one of the results of the economic crisis is a significant slowdown in the scope of this activity.
These are reasonable forms of security, but in the new world situation, it is essential that the banks adopt a new approach to collateral. They must understand the importance of their cooperation in finding a creative and practical solution to the bottleneck that has formed in the system - a bottleneck that is impairing the ability of Israeli diamantaires to grow. In recent meetings with the bank directors together with the IsDMA, we presented a new concept regarding the collateral they demand. According to this approach, the banks will begin recognizing the import of rough diamonds as collateral for increased credit. When you think about it, there is nothing more natural than a solution based on the banks treating diamantaires as they do contractors planning to erect a building.
The new approach to collateral would give the industry and the diamantaires a triple benefit:
1. Increased credit -this solution will make it easier to enlarge the scope of credit and allow the flow of new money into the system;
2. An increased share of rough reaching Israel - it will also provide an incentive to Israeli diamantaires and foreign companies in Israel to import rough directly to Israel, thus increasing the rough share of the Israeli center;
3. Increased scope of local manufacturing - no less important, this approach will encourage increased local manufacturing of stones in which we have a relative advantage. At the time of writing, the banks are still considering this issue. We sincerely hope they will accept this solution and implement it immediately.
I am a great believer in the ability and creativity of the Israeli diamond industry. We have tremendous relative advantages over our competitors and I am confident that these will enable us not only to maintain our position in the future but eventually to improve it. In the first stage, in order to express these strengths, we - together with the banks - need to ensure that our credit level allows us more freedom of movement. And the sooner the better.
