'We Haven't Seen Rock-bottom'

Stanley Fischer delivers a chilly dose of reality for hopefuls who had thought the end of the crisis might be in sight.

Stanley Fischer delivered a chilly dose of reality yesterday for hopefuls who had thought the end of the crisis might be in sight: "We haven't seen rock-bottom yet," the Bank of Israel governor said, and went on to advise the government against cutting taxes any more this year until it has clear sources of funding in sight.

"We have coped with the economic crisis very well, but haven't reached the end of the recession," Fischer said at the press conference at which he presented the Bank of Israel's annual report for 2008. "We haven't seen the lowest point of this recession," the governor said, driving the point home, and adding that the broad economy hasn't begun to recover yet.

Israeli stocks have been roaring this year, yet many analysts have wondered whether the spurt is a "bear market rally" - a hiatus in the retreat. Fischer yesterday suggested that it is still possible that a major business concern, maybe even two, will collapse. "We have to be prepared for that," he said.

Fischer noted that Zohar Goshen, the chairman of the Israel Securities Authority, had suggested "credit officers" to handle cases of big-scale bankruptcies. The Finance Ministry also suggested a mechanism to help generally worthy companies caught short: "leverage funds" - a joint venture, Fischer explained, of the state and institutional investors, which would lend money to temporarily embarrassed companies.

So far Israel has overcome the challenges well, the governor said. "We have managed to adhere to the principles that guided us in recent years," he noted, presumably referring to fiscal discipline by the government. "I hope we will continue along that path."

On the Finance Ministry's long-standing plans to lower tax in 2009, Fischer waffled, but waxed dubious. In the absence of firm up-to-date data, he said, he doesn't have the tools to make a firm recommendation. At the start of 2009, the Bank of Israel had supported tax cuts as a way to stimulate the economy. But at this time, before allowing the cuts to be made, the government has to consider its funding, Fischer said.

Karnit Flug, the head of the Bank of Israel's research department, had expressed firm opposition to tax cuts this year or in 2010. In her opinion, at the kind of deficit the government will be running this year, and especially given the extreme shortfall in tax collection expected for the year - tax cuts would be "problematic," she told the reporters.

The debate on tax cuts could resume when the economy starts to rebound, Flug suggested.

The government is going to run a huge deficit, equivalent to almost 6% of gross domestic product, the Bank of Israel predicts. That translates into NIS 42 billion, or roughly one-seventh of the budget for 2009.

For the moment the central bank is forecasting economic contraction of 1.5% this year. But its economists think the economy will begin to rebound, growing by 1% in 2010 - which still means contraction per capita.

Just a month and a half ago, the Bank of Israel had been predicting that the Israeli economy would grow by 2.3% in 2010.

These are not optimistic forecasts, yet Fischer stressed that relative to most of the West, Israel is in good share. It doesn't have the kind of structural problems that the United States and Europe have, he added.