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The Shekel Before the Storm GA Magazine / Israel ain't broke By Sami Peretz and Ruth Schuster Tags: GA, Jewish world, Israel news Full coverage of the 2008 GA conference For the first time in its history, Israel is contending with an economic crisis that is entirely imported. Israel's banks, Israel's financial system, Israel's economic leaders - none had anything to do with its making. True, that doesn't mean it's not being affected by the crisis, which would be something of an impossibility for an industrialized country in the era of globalization. The layoffs are starting to mount in all sectors, from hi-tech to finance to industry, affecting big companies like software giant Amdocs and tire manufacturer Alliance as well as a host of technology startups. Israel's tax revenues are falling hard, not only year over year, but mainly compared with the government's take in the same periods of 2007. And Israel's financial chieftains remain on high alert as the crisis spills over from the financial sphere into real economic activity, worldwide and in Israel too. Advertisement Yet so far, though banks and brokerage houses elsewhere melted down in the first wave of the global crisis and whole nations trembled on the brink of default, Israel has been weathering the storm well. While some local investment firms have been downsizing as the stock market plunges, for the most part the layoffs have been low-key. The question is whether Israel can continue to swim as the second wave - the impact on real economic activity, like continued layoffs, declining manufacturing and consumption, and pain felt in every pocket - reaches its shores. Ask Bank of Israel Governor Stanley Fischer, and he will tell you that yes, Israel can. "Israel's main advantage is that we have strong banks," Fischer tells the Haaretz GA Magazine in an exclusive interview. "We aren't experiencing a financial crisis like in America or England. We don't have major problems in our housing market, which is the source of the trouble in the U.S. We have a fiscal policy and a government that behaves responsibly." All the same, this doesn't mean Israel's less sophisticated, less leveraged financial system is better than the American one, says Fischer. The unfolding of the economic crisis in the United States primarily shows that better regulation, and better coordination among regulators, is needed, he says. Fischer - a world-renowned economist who moved to Israel to take up his post in 2005 after serving as chief economist of the World Bank, deputy managing director of the International Monetary Fund and vice chairman of Citigroup - does not foresee a full-blown recession in Israel, as defined by two consecutive quarters of negative growth, though he does expect a slowdown. His words of wisdom? Don't panic. "We continue to cope with the problems relatively well," says Fischer, 65. "We have no doubt that we'll be affected, and if we panic, we'll definitely have trouble. But our situation is relatively good and it's nothing like the situation in America. There, recession is expected. I assume that we won't go into a recession." "But there's no doubt that we'll see a slowdown," Fischer adds, because Israel is affected by equities, interest rates and exporters. The Bank of Israel is projecting that Israel's GDP will grow by 2.7 percent in 2009, while growth in 2007 had been a much faster 5.3 percent. That means tax revenues can be expected to slump as businesses hurt and unemployment creeps back up. The government will have less to spend, which - depending on the severity of the situation - could affect state support for the defense establishment and assistance for the poor, the aged and the weak. In theory, the Bank of Israel's mandate is to keep prices stable. But in practice, Fischer says, while keeping inflation in check remains central to its role, monetary policy must also stimulate the economy. "We have to support the economy, stick to the framework of the very strong macroeconomic policy [that the government has created], just as we did over the last five years," he says, adding that the Bank of Israel needs "responsible budget management and monetary policy that monitors inflation and also supports the two other goals of the monetary policy: financial stability and encouragement of growth and employment." No crunch here As the crisis shatters consumer confidence worldwide, there's no consensus on solutions. Governments the world over are struggling to contain the damage as economists argue over the merits of conflicting methodologies. Some politicians urge a clampdown on spending as revenues evaporate, while others call for lavish spending to stimulate the economy. British Prime Minister Gordon Brown partly nationalized the reeling banks, earning applause for his swift, decisive action. He even spurred Washington to mull reshaping its $700 billion rescue package, from a sponge to soak up so-called "toxic equities" into a more equity-based proposition that would bring the taxpayer some assets for its buck. Meanwhile, Iceland's financial system collapsed, and Argentina trembled on the brink of bankruptcy and nationalized pension funds. Banks throughout Europe, from Switzerland to Germany to Spain, tapped their respective governments for support as Hungary begged for an emergency rescue. In Israel, though, Fischer is advising against rash government action to fix what ain't broke. The top priority, he says, is helping companies get credit - but not necessarily as much as they think they deserve. Just don't call the credit "difficulty" in Israel a crunch, he says, because the term is too extreme to describe Israel's situation. "It's very important that we don't do things just in order to be doing something," says Fischer. "We know what we're doing. At this point there are several issues on the agenda, but the most important is to help small and midsize companies obtain credit or help the banks reach a situation where they will want to extend credit to such companies." How is that to be done when banks are leery of lending in terror of borrowers going bankrupt and defaulting on their loans? It's a vicious circle: Banks that are afraid to lend suffocate companies, which then collapse and default on loans; this hurts the banks, which become even more afraid to lend. One idea being tossed around, says Fischer, is to set up a pool of credit to be extended through the banks. "We're consulting with the Finance Ministry on this," he says. "This is a very important issue. People talk a lot about credit problems, but you have to take into consideration that in the past there was too much credit in several sectors." But things have to stay in proportion. Credit had been too generously given in some sectors, Fischer says. "People talk a lot about credit problems, but you have to take into consideration that in the past there was too much credit in several sectors," he says. "We have to be sure that we don't ask the banks to finance things that have no future. They have to consider what's right to finance and what isn't." Czechs and balances Stanley Fischer was born in Mazabuka, Zambia, in 1943. He moved with his family at the age of 13 to Zimbabwe (then known as Southern Rhodesia), where he was active in the Zionist youth movement Habonim. After studying Hebrew at Kibbutz Maagan Michael, he earned his bachelor's and master's degrees at the London School of Economics. Fischer then moved on to the United States, where he earned his doctorate at the Massachusetts Institute of Technology in 1969. After teaching economics at the University of Chicago, he returned to MIT as an associate professor, becoming a full professor and head of its economics department. One of his students was Ben Bernanke, chairman of the U.S. Federal Reserve. In 1988 Fischer joined the World Bank as vice president and chief economist, and later served as the first deputy managing director of the IMF between 1994 and 2001. He joined Citigroup in 2002 as vice chairman. When tapped to replace David Klein at the top of Israel's central bank, Fischer, who holds American citizenship, moved to Israel - and surprised everybody with his command of Hebrew. (Indeed, he gave this interview entirely in Hebrew.) Some of his friends and colleagues understood his move, he says, and some didn't. "Somebody asked me, 'If you were asked to be the governor of the Czech National Bank, would you have accepted?'" Fischer recalls. "I said no. And that's exactly the point. This isn't the Czech Republic, this is Israel." Now, after three and a half years in the Holy Land, he feels "very much at home," even if not completely Israeli - "a person 60 years old has a history that doesn't go away," he notes. Fischer won't comment on whether he plans to stay in Israel even after he eventually leaves the job he came to do. "I learned one thing - I try no to look too many years ahead. At the moment I very much enjoy the social life in Israel, and that's a wonderful thing." On the front line Israel's exporters are on the front line as the global economy contracts, but Fischer urges caution. They should be given credit if trouble arises, but "what we don't want is to start financing unworthy projects again," he says. The trick will be encouraging the banks to lend, while making sure "they don't throw good money after bad." Apropos of bad money, Tel Aviv's corporate bond indices have been dropping like stones down a well on spiraling fear that Israel's biggest borrowers are going to default on debt. Late last month a highly respected business baron, Yitzhak Tshuva, shocked the marketplace by becoming the first to hint at future default. Delek Real Estate, a debt-laden company in his business group, proposed that investors switch certain bonds with other ones that had better collateral, but that would lock in a roughly 40-percent loss to investors. The market's venomous reaction to the proposal led Delek Real Estate to reverse its position in a day, but the incident indicates the doubts and fears gripping the market. Many companies, most notably (but not only) in the real estate sector, base their business on borrowing. When their loans come due, they don't repay them from their own resources - they borrow more to repay the loans. Some are worried about what will happen if the unnerved banks won't lend and investors won't buy new bonds. But Fischer doesn't buy the nightmare scenario of big Israeli companies collapsing like dominoes (and taking the banks with them), and certainly doesn't seem to think that an automatic government bailout is a good idea. "We know that no major redemptions are expected in the next couple of years," he points out. "One doesn't always want to tackle a problem before it's arisen, and when there's a good chance it won't arise, either. I'm not saying that there won't be companies that get into trouble. There's also no rule saying that the problem of every issuer of corporate bonds has to be resolved. There's a reason why the yields on these bonds are high. These are things that the companies have to solve by themselves." Shoring up the greenback For all of Fischer's international experience, he declines to offer any economic advice to U.S. President-elect Barack Obama. "It's not appropriate and it's not right for the governor of a central bank in another country to tell the United States what to do," says Fischer. Meanwhile, as the crisis started to unfold in America and ripple out to the rest of the world this year, the dollar collapsed in world markets and shekel spiraled skywards - to the horror of exporters who were receiving income in ever-shrinking dollars and paying costs in ever-rising shekels. In mid-2008 the Bank of Israel started intervening in the foreign currency market for the first time since 1997. Taking advantage of a strong shekel to buy dollars on the cheap, the central bank began by buying about $25 million worth of dollars each business day from March 20 to mid-July, at which point it stepped up the pace to $100 million a day. Its stated purpose was to beef up Israel's foreign currency reserves by between $10 billion to around $40 billion. But many assumed its unstated purpose was to shore up the weakened greenback against the shekel in the local market, as a way of helping the whimpering export sector. Since the Bank of Israel began buying dollars on the market, the greenback appreciated by 16 percent against the shekel. Does the Bank of Israel mean to sit back and take a rest? "A rest? It's not such hard work," Fischer quips. "I'm very, very glad that we embarked on this path," he says. "It gives investors a very important level of confidence in relation to our ability to cope with problems. ... We'll have to consider whether there is a need to continue with this plan." The end is near There have been quite a lot of doomsday predictions about the extent of a global recession, including projections that it could last as long as a decade. But Fischer expects the crisis to start winding down by the second half of next year. "If we define the crisis as negative growth, then it won't be ten years and it won't even be two years," Fischer says. "In the second half of 2009 we will see positive growth in the U.S. They've stated dealing with the financial crisis very seriously, and now we'll see them dealing with the recession through fiscal policy." Meanwhile, as last month rolled to a close, the Bank Hapoalim Consumer Confidence Index dropped to its lowest level since the beginning of 2006. Just as tellingly, the index tracking consumer expectations for the next six months fell steeply, indicating pervasive pessimism. The man from Mazabuka is telling Israelis not to panic, but it's not clear they're listening. Full coverage of the 2008 GA conference Bookmark to del.icio.us   The King is dead Archeologists find new evidence for King Herod's tomb site. Al-Hasbara Israel launches Arabic YouTube channel to bypass Arab media.

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