BoI and Treasury Considering Providing Funds for Banks

Fischer and Bar-On decided to wait for new economic developments over the next few days before deciding on the matter.

In an extraordinary meeting held on Friday, the governor of the Bank of Israel, Stanley Fischer, Finance Minister Roni Bar-On and their most senior advisers discussed the possibility of injecting capital into Israel's banks directly, in order to reduce the effects of the credit crisis as much as possible.

At the meeting, the two decided to wait for new economic developments - both in Israel and around the world - over the next few days before deciding on the matter.

At the same time, the treasury reiterated its stand that it will not levy new taxes, though it will also not cut government spending next year.

They also decided not to cancel stock market trading today, after the big losses in New York moderated as Friday wore on.

The Bank of Israel responded: "According to the bank's figures, Israeli banks have no shortage of credit." The treasury refused to comment.

While preparing plans to deal with the credit crunch, the central bank and treasury are developing another plan to deal with a no less severe problem: fears that the public will flee provident funds and other long-term investments.

Officials fear that further falls in corporate bonds and stocks will lead to even larger losses for provident funds, and investors' rush to redeem them will only make the crisis worse. In September the funds and long-term savings in insurance policies lost 5-6%, and the public pulled NIS 300 million a day from provident funds.

Unless world markets register a huge turnaround, the losses for October will be in the 10% range, based on preliminary calculations. In such a case, redemptions are expected to skyrocket, and the Bank of Israel is examining a number of ways to provide guarantees for the funds. There are two major directions: The central bank would buy up corporate bonds in the open market, or it would guarantee a minimum return for the funds.

In the first case, the state would stabilize the price of corporate bonds, though the main problem with this plan would be in deciding which bonds to purchase - and which not to. Such a move could provide windfall profits for someone.

In the second case, pension savings would be compensated by the state for lost yields. Such a move would calm the public, and hopefully end the rush of redemptions. But it would require a large budgetary outlay, during an economic slowdown with already lower tax revenues.

Fischer stays home

Fischer and Bar-On also expect good news to come out of the International Monetary Fund and World Bank's annual meetings, now underway in Washington.

The 0.5% interest rate cut announced by Fischer in a surprise move last week will take effect today. The bank governor may reduce rates once again on October 27, the date of the regular monthly interest rate announcement. In light of the recent drops in oil and commodity prices, as well as the dollar's strengthening, Israeli inflation will most likely slacken, and Fischer may lower rates at least twice before the end of 2008.

Last week Fischer and one of his senior officials, as well as the treasury's accountant general, canceled their planned trips to the IMF and World Bank's meetings. This is the first time since becoming governor that Fischer has missed an important international economic event after he had announced his attendance.

Bar-On reassures: No Israeli banks to collapse

Bar-On assured the Israeli public on Friday that despite the current global financial crisis, Israel's banks will definitely not collapse. In an interview with Channel 2 news Friday evening, Bar-On said that "based on examination, including one from today, the body overseeing the banks can state with the clearest certainty that the banks in Israel are stable. As I see the situation, and I see it in figures, no banks will collapse."

The finance minister went on to say that "once we wanted to be like America or Iceland, but today we don't. We have a completely different banking system. Here we regulate all the time. No banks have gone under, and none will."

In response to a question whether the treasury will refrain from opening stock market trading on Sunday if the stocks plummet, Bar-On said: "We have to calm down, and calm the public. Markets go up and markets go down and we had three days of nervous trading in the world. I hope everything will be all right."

In a similar interview with Channel 1 news later Friday, the finance minister said "the banks in Israel are stable, in contrast with what is happening outside the country. There is not one Israeli citizen who is not afraid for his savings. But we're seeing deposits. If there was fear over the banks' liquidity, there wouldn't be any deposits."

He added that the treasury has devised plans to address possible scenarios that may arise in light of the crisis, but refrained from revealing the scenarios for fear of creating panic.

Bar-On went on to say that "the crisis will not halt the growth in the economy. We will ensure that the credit crisis is kept under control."