All That Glitters / The Shekel Besieged, Fischer Leads the Cavalry Charge

The Bank of Israel governor rides to the rescue of Israel's industrialists and exporters hammered by speculators.

Eytan Avriel
Send in e-mailSend in e-mail

In Hollywood westerns of yore, when the heroes were surrounded by Indians and their situation looked hopeless, suddenly a bugle call would ring out and the cavalry would gallop in to save the day.

That was the picture on Monday in Israel’s foreign exchange market.

In this case the heroes were Israel’s industrialists and exporters threatened by the shekel exchange rate. Rather than Indians, they were being besieged by foreign and domestic speculators eyeing the dollar-shekel exchange rate as an easy target that could be taken down with little effort for a quick profit. The cavalry was, obviously, Bank of Israel Governor Stanley Fischer, who shot no less than two rounds of gunfire at the speculators.

The first round was lowering the interest rate. After rates in several places, including Europe and Australia, were lowered in the last few days, the shekel looked especially high by global standards − 1.75% before the reduction and 1.5% after − compared with 0.5% in Europe and close to 0% in the U.S.

This made the shekel an attractive purchase for speculators. Their strategy is simple: Take out a huge loan in dollars or euros at negligible interest and invest the money in Israeli treasury bills ‏(Makams‏), cashing in on the interest rate spread. This both pressures the Israeli currency higher and ensures a gain for the speculators.

In terms of the economy in itself, there was no need to lower the interest rate. Inflation is within the government’s target range, unemployment is low and the growth forecast doesn’t hint at a recession or even a significant slowdown. The one and only reason for lowering the rate − and not on the usual date of the last Monday of the calendar month − is to stem the shekel’s climb. The timing itself is meant to send a message to the entire market and the speculators in particular: “Watch out,” the central bank is hinting. “We are ready to do anything, at any time, to prevent the shekel from strengthening any further.”

The second round unleashed by Fischer against the Indians was the declaration of a new program for purchasing dollars. From this point on, the Bank of Israel will buy dollars and other foreign currencies in amounts that offset the foreign currency surpluses generated by the flow of natural gas from offshore reserves. For 2013 these purchases will amount to $2.1 billion.

The logic isn’t complicated: The fact that Israeli gas is now flowing into the country saves us an enormous amount of foreign currency no longer needed to import energy to run the Israel Electric Corporation’s power stations, producing a surplus in Israel’s current account − in other words a flow of dollars into Israel. This flow, if it isn’t offset by other factors, could lead to creeping depreciation of the dollar.

No final victory

The domestic foreign exchange market was taken by surprise by Fischer’s aggressive one-two punch and reacted accordingly: Within minutes of both announcements the shekel plunged three agorot − nearly 1% − ending up in the range of NIS 3.60-3.61 to the dollar. As in the past, Fischer managed to stabilize the shekel at NIS 3.60 − about 95 in terms of the nominal effective basket rate, the real number maintained by Fischer and the folks at the Bank of Israel.

What about the housing market, which will get another shot of encouragement following the drop in variable mortgage rates despite not having stopped anyhow in two years?

Housing, in Fischer’s eyes, takes a back seat to the danger to exports.

But the foreign currency market isn’t a movie and there’s never a final victory. The important and interesting question is what will happen in the coming months. The problem is that Fischer, a weathered, experienced and valued general, is hanging up his uniform and rifle, and retiring. We don’t know who will replace him. The most frequently mentioned candidate at this point is his deputy, Karnit Flug, but her lead in the race is mainly due to a lack of other heavyweights interested in the job.

This is a failure of the government and Prime Minister Benjamin Netanyahu personally. Whereas at every bank and self-respecting company a search committee is formed for the CEO or chairman and a process is established to examine the candidates, the task of filling the most important job in the economy ‏(together with the finance minister‏) isn’t being taken seriously.

As far as anyone knows, Israel doesn’t have a committee for finding a central bank governor or any administrative process whatsoever for doing so. If this is the case, how will the next governor be chosen? Here’s how: Bibi will decide what suits him, with or without Yair Lapid having a say in the matter.

The question is whether the next candidate will have the ability and public presence to perform actions like those taken by Fischer now, including sudden changes in the interest rate, the buying and selling of dollars, or even the overthrow of recalcitrant bankers, like Fischer did with Danny Dankner at Bank Hapoalim − even when it doesn’t suit some politician who appeals and questions the judgment of the Bank of Israel and its head.

Cavalry to the rescue!Credit: AP