Fischer: Financial crisis to last a year

Prof. Stanley Fischer, the governor of the Bank of Israel, found himself doing mainly two things over the past few days – trying to put Israelis' minds at ease in wake of the financial crisis enveloping world markets, and convincing everyone that the Israeli market is "doing just fine."

Behind the calm façade, however, are some tumultuous feelings. On the eve of Yom Kippur, Fischer applied the first act derived from the global crisis, and unexpectedly announced a 0.5% reduction in interest rates.

Fischer reluctantly shared a few of his notions regarding the crisis and its potential effect on the local economy. First, he told Yedioth Ahronoth, the government would have to reconstruct its 2009 budget before it can bring it to a vote. The budgetary guidelines Prime Minister Ehud Olmert's government approved in August, he added, made no provisions for the crisis seen over the past month.

Second, anyone who thinks this too shall pass within weeks should think again. Fischer anticipates the markets would continue tumbling for at least a year.

Prof. Fischer, why did you announce a decrease in interest rates just before Yom Kippur? What do you think the results of this decision would be?

"The unusual worldwide developments since we made our previous decision about interest rates, two weeks ago, meant that we couldn't wait. The developments in world markets were staggering, so I found we had to declare the decrease immediately.

"The impact should be immediate as well. The banks would have to pay less interest to the Bank of Israel for the funds they borrow and the interest across the financial board should decease accordingly. This would be good for the Israeli market, since it would bring about a slight devaluation in the shekel," he said.

Going down (Illustration: Reuters)  

'Shekel a strong currency' 

You have said in the past that the Bank of Israel has no interest in maintaining foreign currency rates. Has anything changed in that respect?

"Not really, no. We have no problem with the shekel's exchange rate, that is to say the shekel is not facing any major devaluation. It's a very strong currency, which certainly helps when we have to make policy decisions."

What are your views regarding the unusual steps taken by the British government, which partially nationalized some of the UK banks?

"As a short-term solution and as a measure of saving the banks, I guess they had to do it; but the banks that were nationalized now will surely be privatized in the future. That's a given. Nationalization is a way to rejuvenate the banking system; it's not a long-term solution."

Can the Israeli banks be facing such a move?

"The current situation, as we see it, doesn't call for it. There's no reason for us to do it. I can assure you we will support the banking system. The situation around the world is changing rapidly. Israel has fine legal guidelines in place to deal with such things. We truly have a fine banking system," he said.

Prof. Fischer, honestly, can you give us a 100% guarantee that Israeli account holders would remain unfazed?

"Nothing is ever 100%, but I can't see a scenario in which people would lose all their money. We're certainly monitoring the situation and working with the Treasury to prepare for different kinds of scenarios, but you have to remember that people who take risks have to think about the future.

"We can't allow for a situation whereby anyone can just manufacture low-grade (fiscal) instruments, and then, if things go south, expect us to bail them out. You can’t always save everyone."

Keeping clam is good for you (Illustration: AP)

No need to panic

Do you think that the new government would have to amend its budget?

"The budget was formulated before the crisis hit world markets, so any new government would have to reexamine it. The most important thing is that we stand by the goals set in it, especially when in comes to expenditure limits. The Treasury may also have to revise its growth and tax revenue projections," he said.

How long do you think the global crisis will last?

"We are in the eye of the storm. I assume it won't last long, but we are sure to experience some jolts. We will probably hit rock bottom sometime this year and start growing from there. I believe we would need to be in crisis management mode for about a year, give or take."

The International Monetary Fund, which is the most influential financial institution in the world, published revised, lower growth projections for every market, including Israel. Are you worried about these projections?

"The IMF consulted us before publishing its projections. Given today's climate I would say their growth projections (2.8% in 2009, for Israel) are more than reasonable. The world, Israel included, is inevitably facing some sort of a recession. We will be seeing a slower growth rate all over, everyone understands that," he said.

Former Finance Minister Benjamin Netanyahu expressed a need for creating a safety net for Israelis who have saving accounts. What do you think about that?

"I'm all for helping, but we have to figure out how much such a move will cost… and whether or not it is justifiable at this point and in which cases. There is a lot to figure out before we instate a 'safety net'."

Any advice for the concerned Israeli?

"The best advice I can give you is to keep a cool head and make rational decisions. You have to think about the long-run."

Is another 1929 catastrophe heading our way?

"Absolutely not. History has taught us a great deal. Governments and bank chancellors have a much better understanding today of what's happening and how it should be dealt with."

So, you recommend everyone just remain clam?

"Absolutely. Keeping clam is good for you."