Bank of Israel Governor Stanley Fischer
Photo: Gil Yohanan
'If eurozone crumbles, it will hit us all'
Speaking at the Knesset's Finance Committee, Bank of Israel Governor Stanley Fischer says central bank already preparing for developments abroad
"Europe's economic state of affairs is very dramatic and disconcerting; it is yet unclear what the consequences will be in the event that the eurozone crumbles," Bank of Israel Governor Stanley Fischer said Wednesday morning in a briefing at the Knesset's Finance Committee.
"These circumstances are detrimental for the global financial markets as can clearly be seen in rising yield on government bonds in Italy, Ireland, Greece and other countries", the governor added.
"The eurozone countries expect to grow by only 0.2% on average next year, and countries the like Italy, Portugal and Greece are even expected to record negative growth rates.
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"In my opinion, there are two likely scenarios: In the first one, the eurozone survives thanks to some tough decision making on part of several of its members, a matter that will be decided on at the European Summit of the Heads of State in two days in Brussels.
In the second one, European leaders will not make well-timed decisions and the eurozone will crumble. In this event, there is no telling what may happen, but to be sure it will create a mess that will affect us by negatively impacting our exports – a scenario for which we are preparing as well," said Fischer.
Fischer added that the Bank of Israel was planning to downward adjust its current growth forecast for 2012 (3.2%), which would probably be similar to the one published by the OECD – 2.9%.
In comparison to last year, said Fischer, this year's fiscal deficit will amount to about 3.5% of the product – more than the target deficit of 3% (an addition of some NIS 4.5 billion - $1.2 billion).
"We must be prepared to respond immediately to adverse developments with the tools at hand," said Fischer. "The monitory policy conducted by the Bank of Israel has already begun responding to the developments overseas and we cut the interest rate twice already.
"We will also have to affect change in the banking system, such as ordering the banks to increase their capital ratios. There are also several contingency plans at the Ministry of Finance which were formulated during the last crises, such as the establishment of small and mid-sized business funds. Additionally, the government must not stop crucial reforms."
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