Fischer Tacitly Admits: Shekel Is Under Attack

When Bank of Israel Governor Stanley Fischer is asked about government intervention in the markets, he shrugs and says markets should be left alone. Then he adds, "Never say never." Government meddling is usually inefficient, may discriminate against small players and is liable to be tainted by corruption. There are precious few arguments in favor of intervention, Fischer has added, one being that it's better than the alternative.

Never arrived yesterday. The Bank of Israel's draft order is technical: a demand for transparency. When it comes into force in three weeks, everybody, local and foreign, will have to report in detail on currency transactions.

But make no mistake. Central bank officials spelled it out yesterday, in private conversation, that this is just the first move ahead of heavy-handed government intervention, which will grow until the Bank of Israel achieves its real aim - to control the flow of speculative dollars into Israel, and stop the shekel's appreciation against the dollar.

The central bank's subtext is the admission that the Israeli currency market has been under foreign speculative attack for 18 months, and the end isn't in sight. In December, nonresidents were responsible for 66% of the currency transactions in Israel, up from 55% two years ago. In swaps, they comprised 80%. Israelis constituted the majority of transactions only in the simplest sort of currency conversions: 70%.

The true surprise lay in the next step, meaning, what the nonresidents do after they sell their dollars for shekels, sending the shekel skyward. Answer: They buy makams. In December, they held 28.4% of all makams in circulation, worth NIS 38 billion. The Israeli public held 19%, local banks 18.5%, mutual funds 18% and Israeli institutional investors 17%.

More important is the trend: Nonresidents' holding in makams has increased 3,100% in two years.

The central bank hates the speculation for two main reasons. The money could disappear just like it appeared, destabilizing the market and crushing the shekel, which could happen in (for instance ) the event of regional war. Secondly, the influx of dollars is causing the shekel to balloon, which is killing exporters, who are the life blood of economic growth.

The United States bears responsibility for sparking the currency wars, by madly printing dollars, which has sent the currencies of countries behaving responsibly sky-high. They're fighting back: Chile, Brazil, Peru, Mexico and Colombia are buying dollars. Brazil slapped tax on capital gains for nonresidents, first 2%, later jacked up to 6%. Colombia is thinking of forcing nonresidents to deposit 30% of their investments in a special non-bearing account, and is urging its national oil company to leave the dollars it gets outside the country.

In Israeli terms that's like telling Teva, Israel Chemicals and Israel Aerospace Industries not to bring their money into Israel - leave it in foreign banks.

The Bank of Israel has bought dollars to the tune of $45 billion, and it hasn't stopped the influx of dollars or the appreciation of the shekel. It's time for unconventional weapons.

Once it elucidates the identity and pattern of the nonresidents, thanks to its new order, it will be able to tax their gains on makam holdings.

Will tax stop the influx? It may not. A 15% tax on makam gains is peanuts compared with the effective gains the speculators reap from the interest gap between the shekel (2.4% a year on 1-year makams ) and dollars (practically zero ). If the Bank of Israel raises its rate more, as it wants to, the tax becomes even less meaningful.

But if Fischer really wants to, he has other weapons at his disposal. In any case, the Bank of Israel's announcement clarifies that Fischer has decided he has to take aim.