The crisis began in the early 1980s and worsened after the Israeli economic stabilization program of 1985, during which the inflation rate dropped dramatically.
[3] In the 1950s, following a deep crisis within the kibbutz movement, a new department was established in the Ministry of Agriculture with the primary purpose of developing a recovery program for the kibbutzim.
This understanding solidified when the Israeli government had full control over the capital market and allocated credit to selected, favored destinations based on its priorities.
These credit guarantees created a false sense of security within the kibbutzim and the banks, leading them to believe they would be able to overcome any future financial crises.
The banks, naturally, along with a significant portion of Israeli society, viewed the conduct of the kibbutzim as the primary cause of the crisis.
The main social factor was the lack of effective leadership resulting from the rotation norm encouraged by the kibbutz movement to maintain control.
Claims directed at the banks included: It was argued that the inflation-stabilization plan implemented by the government in July 1985 was too drastic, leading to real interest rates of hundreds of percent.
Additionally, many investments in agriculture yield profits only years later—such as plantations, cattle and sheep farming, and export-oriented industries encouraged by the government—all of which required substantial credit.
Erlich introduced economic reforms aimed at shifting the Israeli economy from its socialist characteristics to a more capitalist model.
Despite later changes in Finance Ministers and economic programs designed to curb inflation, the crucial step of reducing government budgets was not implemented.
These years were notable for contemporary financial experts, who successfully managed to balance rampant inflation and a gradually strengthening dollar against the pound and the shekel, while profiting from the volatility and uncertainty in the capital markets.
Many argued that it demonstrated the state's preference for a particular sector, while other Israeli businesses that collapsed during those years due to government actions were left without similar support.
The banks improved their financial situation after receiving government deposits and significantly increased the repayment of kibbutz debt compared to before the complementary settlement.
In January 2008, the kibbutz movement fulfilled its part of the debt arrangements by transferring 25% of its holdings in Tnuva to the state, a financial value of about $100 million.