Fischer: Our situation is better than I expected
Governor of the Bank of Israel Stanley Fischer reassures about Israel's banks and economy.
Eran Peer, Avi Temkin and Ron Stein12 Oct 08 17:39
On the eve of the annual meetings of the IMF and World Bank in Washington DC, at the height of the worst financial crisis since 1929, and with bourses around the world crashing, Governor of the Bank of Israel Stanley Fischer, in a special interview with "Globes", radiates calm and control. "Certainly, Israel will be hit," he says, "we live in the world and we're not an island, but our situation is relatively good, and better than I expected."
All the same, at the end of last week Fischer indicated through his actions that the danger is more threatening than ever, even to the local market. He cancelled his planned trip to the prestigious gathering in Washington, and decided to stay in Israel, as close as possible to events here, without time differences and the flight time home.
"I thought it was right to stay with my finger on the pulse at this time," Fischer explains.
But that wasn't the only step he took. Just before Yom Kippur, Fischer cut the Bank of Israel's key interest rate 0.5%, as part of a coordinated reduction in interest rates by central banks around the world. This was because "since the previous interest rate decision, the global financial crisis had become much worse," Fischer says. "Given the consequences of the crisis for the local market, the chances of a slowdown in the economy in the near future grew. The decision to cut interest rates arose from the need to act to strengthen the economy's ability to deal with the challenges facing it."
Globes: Why is there no deposit insurance in Israel?
Fischer: "If you look at deposit insurance around the world, you see that governments can't meet the insurance programs. Insurance is good in the event of a crisis at a single bank. In a routine situation, it's possible, but when there's a general crisis as there is now, it turns out that deposit insurance is never high enough. When crises happened in recent years in Israel, the government and the Bank of Israel intervened, and people did not lose all their deposits."
What is the condition of the Israeli economy going into the crisis?
"The Israeli banking system is not exposed to the problems of the banks overseas. We are entering the crisis in a good position, and that shouldn’t be forgotten. It's easy to say, wow!, the world is crashing, but you have to ask where the effects will be and how they should be treated. For example, what will we do if there's a fall in growth? We are preparing for that, and we'll be ready to use the tools that we and the Ministry of Finance have."
And is there a fear that an Israeli bank might collapse?
"Israel's banks are in a strong position, and the Bank of Israel is ready to support them. Sometimes, the way the public behaves causes something to happen, and that's a question of providing liquidity. If a need arises to provide liquidity, we will do so that's our role. Will everyone who wants to sell be able to sell quickly at the price he wants? That's hard to promise, and there will be those who will have to sell quickly and for less money."
There is a lack of trust over the real extent of the Israeli banking system's exposure to global problems. Every time some institution collapses, it turns out that the Israeli banks are damaged to some degree.
"We have detailed information about the overseas exposure of the banks. Someone in "The Marker" supplement wrote that 'finally the Supervisor of Banks has woken up and asked for data.' That's utter nonsense. We have all the data, all the time. We routinely receive data quarterly, and now we have switched to daily reporting. Our banks are robust."
The financial crisis has caught Israel is the midst of a political crisis. It isn't clear whether a government will be formed, and who will be minister of finance. There is a fair possibility of elections, and the fate of the 2009 budget is also unclear. "There is political noise as there is everywhere, perhaps a little more so in Israel, and that doesn't contribute to the economy," Fischer says with Anglo-Saxon understatement. "But despite all the political changes of the past few years, the government's fiscal policy has remained fairly stable, and in the past six years, the results have been good."
Is the Finance Ministry's 3.5% growth target for 2009 realistic?
"The budget is perhaps not realistic in relation to the expected rate of growth, but in any event I would recommend letting the automatic stabilizers do their jobs. We face a great deal of uncertainty over what will happen in the US economy, and so to start producing forecasts is unreasonable."
How will inflation develop?
"I believe inflation will start to fall. There are a few more months of high inflation in the pipeline, and from the beginning of 2009 I expect it will start to fall."
Where is the shekel-dollar exchange rate headed? Are you still ready for a situation in which it falls below three shekels to the dollar?
It's hard to estimate the effect of the step being taken in the US on the dollar. If they don’t succeed with the plan, that will be a big problem for the dollar, and it could be that more financial institutions will collapse. If the plan succeeds, the supply of US Treasury bonds will grow, and that will also have an effect. It's clear that, as long as the financial situation in the US continues to be severe, the shekel will strengthen, because Israelis' natural refuge is the dollar, and if they start to think that the dollar is less safe, they'll come back home to the shekel. It's impossible to give a projection. We expected that the appreciation of the shekel would hit exports and that imports would rise, but, for now, that hasn't happened; if there's a drop in exports, it's very small."
You will soon reach the currency reserves target you set of $40 billion. Will the planned purchases of dollars continue?
"We will reach the target at the beginning of December, and then we'll decide."
Fischer sees the measures taken by governments in appositive light. "In a financial crisis, you must first stabilize the situation," he explains. "Even the US has nationalized. The loan given to AIG is nationalization, with the government imposing a break-up of the company and holding 80% of the shares. In Europe, no-one feels comfortable with nationalization, and so the Dutch and Belgian governments will sell Fortis as fast as possible."
Are we now in a situation similar to that of May 1930, when the world's banks collapsed one after another? Can you see a similar scenario today?
"In 1983, in his thesis, current Federal Reserve Bank chairman Ben Bernanke wrote about the Great Depression, and argued that the crisis did not come about because of a fall in the money supply, but because the system of bank credit collapsed. One can therefore presume that the person who heads the Fed today recognizes the importance of credit. In the 30s, they didn't understand this, but today they do understand the risks of a credit crisis. On the other hand, the system is now far more complicated, and so more ambitious steps are required."
Will the world slide into a prolonged depression?
"We have been talking only about the financial side, but there's a real side. Up to now, the slowdown in growth is small,