Last update - 00:00 21/03/2008
The horse trader: Stanley Fischer as opportunist
By Eytan Avriel
When they call a financial manager an opportunist, they mean he leaps on investment opportunities he encounters, he doesn't plan in advance. Opportunism isn't normally an epithet for central bank governors, but there's no other word for the behavior of the Bank of Israel.
It turns out that the Bank had been thinking of beefing up Israel's foreign currency reserves for months, from less than $30 billion to $40 billion. Why? Israel's reserves had been high compared with other countries until about five years ago. But then our GDP grew and our reserves didn't, so now the reserves are low relative to other countries.
If we hadn't been in the middle of a financial storm, and if the central bank hadn't suddenly upped and intervened in forex trading last week, the decision might have passed not unnoticed, but unremarked. Israel's forex market turns over $2 billion a day, and $25 million isn't even a ripple. But there's no coincidence of timing here. Fischer is demonstrating the horse sense of a trader. He's taking advantage of the low dollar to do what he wanted to do anyway, while introducing another element supporting the dollar into the market.
A sum of $25 million a day may be small, but a commitment to buy $5 billion a year on the open market is not. It increases the probability of the dollar appreciating against the shekel versus the probability of the dollar continuing to weaken.
No wonder that the forex market responded by sending the dollar more than 1% higher yesterday. Fischer may look and sound like a dull professor, but this month he proved he can pull rabbits out of his hat. He can present creative solutions , too.
All this leaves one question. Why does Israel need $40 billion in its safe? Forex reserves serve as an economic safety net for a rainy day. Say one day everybody and his pet rabbit runs to buy dollars, and the exchange rate spirals out of control - then the central bank could sell dollars and stabilize the market. The thing is, there is no consensus about how high a nation's foreign currency reserves should be. Avi Ben-Bassat wrote a formula in his doctoral thesis in 1979 based on export and import levels. Governor David Klein thought that in a world of free-floating exchange rates, forex reserves should serve only to return government debt. Stanley Fischer, on the other hand, perhaps because of his rich experience in handling crises around the world, believes that the foreign currency reserves are ammunition for bad times. Like any general, he wants to bolster the force at hand, and if at the same time he achieves another goal like supporting the dollar, well and good.