There has been much good news this week about the Israeli economy. Writing in the Financial Times, Sir John Reed observed how the success of  ‘Israel Inc’ has defied isolation.

The OECD’s latest analysis is incredibly optimistic. Growth will remain strong, if a little lower, at around 3.25% in 2017. Unemployment is to remain relatively low at about 4.5%. while inflation will stay under 2%. It is interesting to note that private consumption will be the engine the drives the economy, as stats on the average wage continues to show overall growth.

One sector of the economy that in the past couple of years  has really taken off – pun intended – is aviation travel. The Israeli Aviation Authority has released figures illustrating how average prices for travel have dropped between 12 and 30% over the past three years. In parallel, the number of airports operating flights to Israel has risen from 110 in 2012 to 138 last year.

Judging from the mass of people at Ben Gurion airport yesterday, that pattern is set to continue. This means far more jobs for the travel and local tourism industries.

Where is the catch? Well, I have written countless times about structural problems – vested interest blocking urgent reforms in the ports, Electricity Corporation, import monopolies on food items and cars – to name but a few. I want to concentrate here on something more unusual; the ugly word called ‘debt’.

First, it emerges that banks have been lending so brashly to the home sector that individuals have taken out 23% more in loans than they did just three years ago. These levels are not yet dangerous, and as noted above the economy can bear it. However, the numbers show similar trends to those leading up to the sub-prime collapse of a decade ago.

That is very worrying. The question is why have the banks gone down this path?

Consider the ‘super defaulters’. Since 2010, seven of Israel’s wealthiest individuals have run up massive corporate debt. This is when the banks are forced to wipe off billions form their financial statements. The latest such incident involves Eliezer Fishman.  The current rescue proposal would allow him to walk away from nearly 1.5 billion nis (close to US$0.5 billion) of his debts to the banks, mainly Bank Hapoalim.

This has led to a public outcry. Why? Because the people who will have to take up the slack are those who have been allowed to or encouraged to take out extra small loans, paying lots of unnecessarily high interest. In other words, the banks quietly pass on their mistakes to the average person, and the Bank of Israel appears powerless to stop this evil.

In other words, the Israeli economy is doing well. The problem is that the Israeli economy is being propelled by private consumption, which in turn is fed partially by those troublesome bank loans. That might suit short-sighted politicians, but not the long term prosperity of the country.