Fischer Accepts GOI Offer to Be Next Governor of

UNCLAS SECTION 01 OF 03 TEL AVIV 000170

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN IS ECONOMY AND FINANCE GOI INTERNAL
SUBJECT: Fischer Accepts GOI Offer to Be Next Governor of
the Bank of Israel

This cable is classified Sensitive but Unclassified. Please
handle accordingly.

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Summary
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1. (U) On January 9, Prime Minister Sharon and Finance
Minister Binyamin Netanyahu jointly nominated
Professor Stanley Fischer as the next Governor of the Bank
of Israel. Fischer accepted the nomination the same day,
although it will require further administrative and
political approvals, including by the Cabinet and the
President of Israel. The announcement that a non-Israeli
was being offered such an important economic post created a
media furor, although none of the critics of the decision
deny Professor Fischer's accomplishments and achievements.
Those who support the nomination, including the Prime
Minister and the Finance Minister, believe that the
nomination will reap fruit in terms of encouraging
investment, and boosting international recognition of the
Israeli economy in the era of globalization. End Summary.

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And the Envelope Please...
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2. (U) With David Klein's term as Governor of the Bank of
Israel ending on January 16, readers of the local press were
treated to several weeks of speculation regarding the
identity of the next Governor. According to press reports,
none of the candidates proposed by the search team made up
of the Director General of the Prime Minister's Office and
the Finance Ministry were acceptable to both institutions.
As a result, it appeared increasingly likely that Dr. Klein
would be appointed to a second term as a "compromise
candidate."


3. (U) It turned out that a compromise candidate was found,
but it was not Klein. Finance Minister Netanyahu told radio
station Kol Israel on January 10 that he had felt it was
unlikely that someone of Fischer's status would agree to
accept the position, and that only on the Sunday morning
before he and the Prime Minister were supposed to meet to
make a final decision did Professor Fischer agree to accept
the position. Netanyahu said both he and the PM agreed that
having Fischer at the BOI was a golden opportunity for the
Israeli economy.

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Appointment of "Outsider" Raises Shekels
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4. (U) Israeli press play was fairly homogeneous, with
commentators simultaneously highlighting Fischer's gold-
plated economic credentials while criticizing the selection
of a non-Israeli for such a key position here. Most
articles noted that, although Fischer was one of the
architects of the 1985 Economic Stabilization Plan, which
brought inflation down from more than 400% in that year to
the double digits, he does not speak fluent Hebrew, and is
naturally not completely versed the political and economic
forces at play in Israel. Sever Plotzker, Economic Editor
of Yedhiot Achronot, stressed that, although Fischer "is not
familiar in depth with the Israeli economy, speaks only
basic Hebrew," ... the fact that he "consented to accept the
post of Governor of the Bank of Israel and give up a salary
worth millions of dollars and a senior position in an
American financial institution, sends a highly optimistic
message about the Israeli economy... Although it would have
been better to have an Israeli governor for Israel's central
bank, we will accept him as a new immigrant with open arms."

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Fischer's Views on the Israeli Economy:
Watch that Budget Deficit
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5. (U) Fischer outlined his economic views at Tel Aviv
University on November 30, when he was in Israel for the
jubilee celebration of the Bank of Israel. Almost to a one,
they reflect positions championed by Finance Minister
Netanyahu. Fischer criticized the centralization of
interest rate decisions in the hands of the BOI Governor,
and argued that a monetary policy committee should make such
decisions. He cited an ideal inflation rate of around 2
percent, noting that a negative deviation can be as serious
as the opposite. (Note: This appears to have been a
negative reference to the tight monetary policy pursued by
Klein, which led to negative inflation in 2003). Regarding
taxes, although he did not refer specifically to Israel, he
indicated that the global trend is reducing tax rates. He
felt that Israel needs to take a more serious and systematic
approach to social welfare. He is in favor of the Bachar
capital market reforms.


6. (U) Regarding the Israeli fiscal framework, Fischer
argued that the budget deficit remains too large as a result
of a bloated public sector and inflated defense burden. He
spoke strongly in favor of implementing economic reforms.
Fischer is also known for his belief that there is no growth
without peace.

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Positive Reactions from Economic Circles
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7. (U) Professional economists almost universally approved
of the Fischer appointment, quickly issuing comments January

10. Former BOI governors were especially effusive. Yackov
Frankel told Haaretz that "This is an excellent nomination
of a man who is a first-rate professional and who has
decided to immigrate to Israel and lead the Bank of Israel."
Frankel added that he is convinced that Fischer will
maintain monetary stability, while promoting sustained
economic growth. Former BOI Governor Arnon Gafni reminisced
to Kol Israel about Fischer's key assistance in bringing
down Israeli inflation in the mid-1980s. He said that
Fischer is one of the finest economists in the world, as
well as a loyal Jew. Klein himself, whom one MoF official
said took the news as "the real gentleman he is," noted
Fischer's status as a "first-rate economist," and said that
Israel will benefit from Fischer's broad connections.


8. (SBU) The private sector was also pleased by the
announcement. One mission contact, head of economic
research at a major Israeli bank, told us he was "very happy
and surprised" by the nomination. He noted "foreign
financial institutions will be very pleased by the
appointment." He said he expected Fischer to stress the
importance of fiscal stability. Although Fischer was likely
to work well with Netanyahu and other politicians, he was
likely to be "tested" by the Knesset Finance Committee in
his role as economic advisor to the government. This
contact said he expected Fischer to call on his extensive
international contacts to support his policy positions, and
would put these contacts to good use in upcoming policy
battles.


9. (SBU) Another mission contact, the head of an
international bank's Israel office, told us he expected
Fischer to do well as Governor, both domestically and
internationally. He had sat in on a number of meetings
between Fischer and PM Sharon, and noted "Sharon listens
when Fischer speaks." Internationally, Fischer possessed
immense credibility. Finally, he noted, domestic and
international banks operating in Israel were certain to find
out soon that there would be "no more bullshitting the
Israeli regulators..."


10. (U) Ohad Marani, Former Director General of the Finance
Ministry, told Kol Israel that in spite of the predictable
initial criticism, he thinks that this will be one of the
most successful appointments by the State of Israel. He
noted that Fischer's ability to integrate the theory and
practice of economics will result in his being a very
successful Governor. Marani stressed that, although Fischer
is an "American import," Israelis recognize American talents
in all possible areas - academic, business, art, sport, as
well as economic.


11. (U) Perhaps the most objective observer, the stock
market, racked up immediate gains following the nomination.
The dollar has remained stable.

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Political Echelon: Mixed Reviews
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12. (U) The reaction to the news was more heterogeneous
within the political sphere. Labor Party leader Shimon
Peres, who worked closely with Fischer at the time that the
1985 Stabilization Program was implemented, expressed wide
support for the appointment in a January 10 interview with
Kol Israel. Peres noted that the nomination of a non-Israel
was not uncontroversial, but reminded listeners of the many
prominent Israeli immigrants.


13. (U) Even MK Amir Peretz, Netanyahu's nemesis, appeared
to be open-minded. He is pleased that Fischer understands
the connection between peace and economics, and said that he
hopes he will be able to resolve economic-social issues.
Peretz said the test will be whether Fischer succeeds in
reducing the income gaps in the society.

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Naysayers
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14. (U) Former Shinui Party Minister of the Interior
Avraham Poraz strongly opposed the nomination, saying that
it was unacceptable for a non-Israeli to hold such an
important position. He noted that, although Fischer is
Jewish, he did not immigrate, did not serve in the army, nor
did his children, and although he may be a fist-class
economist, he was divorced from the average Israeli
experience.

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Fischer's Challenges
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15. On the policy front, Fischer is likely to face at least
three basic challenges:

Philosophy: Fischer will have to decide whether the Bank's
effort to maintain price stability should be leavened with
the political objective of job creation. Although Klein and
Netanyahu agreed on the importance of using monetary policy
to battle inflation, Netanyahu felt Klein's conservative
financial stance was too harsh. Now that the Labor Party is
in the government, the pressure to lower the 10 percent
unemployment rate and to act on the hot button issue of an
increased poverty index will increase further.

Independence: The Bank is independent and the Governor
retains sole decision-making of the interest rate and money
targets. The Finance Ministry and Klein have sparred on who
can be primary dealers of government bonds. Finance will
continue to push to establish a committee with outside
members chosen by the government to make interest rate
decisions. Klein strongly opposed such a step, but it
appears likely Fischer will be more amenable to working out
a modus vivendi.

Labor: Klein has tried to tie BOI staff compensation to
performance and to ensure bank workers are putting in the
hours they are supposed to and are doing appropriate work.
For this he got a union revolt with epithets written on the
bathroom walls. The labor strife with the bank's highly
compensated workforce will continue if the next governor
tries to bring the bank into the 21st century.

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Biographic Information
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16. (U) Fischer is:
- 61 years old;
- Born in Zambia, 1943;
- Currently serving as Vice Chairman of Citigroup, joined in
2002;
- First Deputy Managing Director of the IMF, 1994-2001;
- Head of the Economics Department at MIT, 1990-94;
- Chief Economist World Bank, 1988-1990;
- Adviser to GOI in 1985; helped draft that year's Economic
Stabilization Plan;
- Was a visiting senior lecturer at Hebrew University, long-
standing connection with the Bank of Israel;
- Assistant Professor of Economics, University of Chicago,
1969-73;
- Doctorate in Economics from MIT, 1969;
- Studied at London School of Economics, 1962-66.


Kurtzer