Identifier
Created
Classification
Origin
08TELAVIV662
2008-03-20 13:04:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:
BOI GOVERNOR FISCHER -- FINANCIAL CRISIS HAS NOT
how-toVZCZCXRO0412 OO RUEHROV DE RUEHTV #0662/01 0801304 ZNY CCCCC ZZH O 201304Z MAR 08 FM AMEMBASSY TEL AVIV TO RUEHC/SECSTATE WASHDC IMMEDIATE 5943 INFO RUEHXK/ARAB ISRAELI COLLECTIVE IMMEDIATE RUEHFR/AMEMBASSY PARIS IMMEDIATE 1665 RHEHNSC/NSC WASHDC IMMEDIATE RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000662
SIPDIS
SIPDIS
NEA/FO FOR DANIN; NEA/IPA FOR GOLDBERGER, SHAMPAINE,
ZIMMER, SACHAR; EEB/FO FOR DIBBLE; EEB/IFD FOR GARRY; PARIS
FOR USOECD JMCCRACKEN; TREASURY FOR CONNOLLY; NSC FOR ABRAMS
E.O. 12958: DECL: 03/19/2018
TAGS: ECON EFIN PGOV OECD PREL IS KWBG
SUBJECT: BOI GOVERNOR FISCHER -- FINANCIAL CRISIS HAS NOT
YET HIT ISRAEL
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.
-------
Summary
-------
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000662
SIPDIS
SIPDIS
NEA/FO FOR DANIN; NEA/IPA FOR GOLDBERGER, SHAMPAINE,
ZIMMER, SACHAR; EEB/FO FOR DIBBLE; EEB/IFD FOR GARRY; PARIS
FOR USOECD JMCCRACKEN; TREASURY FOR CONNOLLY; NSC FOR ABRAMS
E.O. 12958: DECL: 03/19/2018
TAGS: ECON EFIN PGOV OECD PREL IS KWBG
SUBJECT: BOI GOVERNOR FISCHER -- FINANCIAL CRISIS HAS NOT
YET HIT ISRAEL
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.
--------------
Summary
--------------
1. (C) Meeting on the day after a major decline in stock
markets worldwide, Governor of the Bank of Israel Stanley
Fischer told the Ambassador on March 18 that the world
economy is still closely tied to the U.S. He said that the
Federal Reserve Board and EU Central Banks have both
performed well during the crisis, but expressed irritation
with articles and statements which inflame public sentiment
and erode confidence in the world financial system. Fischer
stated that Asia and Israel have not yet been deeply affected
by the financial crisis, although Israeli exporters have
sought support from the government in the face of the surging
shekel. He was concerned that falling stock prices would
make it harder for companies to raise capital, leading
eventually to declining investment. On fiscal issues,
Fischer said that the GOI has overpromised on spending and
that annual expenditures would have to rise dramatically to
fulfill these promises. The GOI needs to formulate and stick
to a simple fiscal rule to determine its annual spending
increases. He advised the USG to weigh in with its concerns
regarding spending pressures on the GOI and speculated that
the government would ultimately settle on an expenditure
increase of 2.5 percent for 2009. Regarding the OECD
accession process, which Fischer referred to as "remarkably
far-reaching." he said that all was going well. Fifteen
teams have been set up to meet with OECD counterparts to work
on updating Israeli laws and regulations in a wide variety of
areas and the Ministry of Justice is working on passage of
the necessary anti-bribery legislation. Fischer said that
the Ministry of Foreign Affairs wanted Embassy Tel Aviv to be
the point of contact for the USG on all OECD-related issues.
Fischer also discussed the Israeli-Palestinian correspondent
banking relationship (reported septel). End Summary
--------------
World Economy Still Tied to U.S.
--------------
2. (C) The Ambassador met with Governor of the Bank of
Israel Stanley Fischer on March 18, at a time of severe
weakness in the dollar and turmoil in world financial
markets. Fischer said that this crisis is less complex than
some others in recent memory, but said that it is more
important in terms of impact on the global economy. The U.S.
economy is now less dominant than in the past due to the rise
of Asia and the EU, comprising only 22 percent of the world
economy now, compared to 50 percent in 1950. However, the
world has by no means "decoupled" from the U.S. economy and
Israel in particular is very much affected by it. The
present crisis has not yet affected Asia nor had a big impact
in Israel, although exporters have asked for government
assistance in the face of the surging shekel. However, the
worldwide decline in stock prices -- including in Israel
where the market fell four percent on March 17 -- will make
it more difficult for companies to raise capital and likely
lead to reduced investment.
--------------
Central Banks Doing Well
--------------
3. (C) Fischer praised the Federal Reserve Board for its
handling of the crisis and noted that the EU Central Bank has
shown its maturity by responding quickly and properly, in
marked contrast to its handling of past crises. He noted
that the Central Banks had maintained liquidity in the
markets, but were now grappling with the problem of how to
restore confidence in the banking system. He described the
role of a central bank and its relationship to a country's
treasury in some detail, noting that there is a limit to how
many failed institutions a central bank can absorb before it
begins to materially affect the amount of money circulating
in the economy.
--------------
Everyone Should Just Keep Quiet
--------------
4. (C) Fischer also stressed the importance of psychology in
handling a financial crisis of this magnitude, noting that
TEL AVIV 00000662 002 OF 003
the worst thing to do is to fan the flames of public concern.
He expressed particular irritation with statements and
articles which cause panic and erode public confidence in the
worldwide financial system. Regarding recent discussion of
losses in local pension funds, Fischer was not concerned,
saying that this simply reflected the state of the
international financial markets. On the movement of bond
funds, which have been increasing in value as interest rates
have gone down, he said that "they love declining interest
rates, not low interest rates."
--------------
GOI Has Made Too Many Promises
--------------
5. (C) In response to the Ambassador's comment on the
pressure on the government to increase spending, Fischer
noted that all of the government's recent spending
commitments are in the form of promises for the future.
However, at some point, he added, promises have to be acted
on, and a BOI report to be released soon documents that
fulfilling the accumulated promises would require raising
spending by much more than the presently-accepted 1.7 percent
year-to-year increase. In the past, the MOF has succeeded in
"squashing" most demands for increased spending, but that
will become harder to do. Fischer stressed that "the
government's credibility depends on how it deals with
spending." Finance Minister Bar-On is very tough on the
issue and the new Budget Director Ram Belinkov is, if
anything, even tougher. than his predecessor. However,
Belinkov, who, according to Fischer would actually prefer to
lower the 1.7 figure, lacks previous Budget Director Kobi
Haber's diplomatic skills and his tough stance will likely
engender angry reactions. The Prime Minister is aware of the
issue, but Fischer advised the USG to make its views known as
well. He also agreed with the Ambassador's suggestion to
continue to discuss the issue as the JEDG (Joint Economic
Development Group) meeting approaches later this year.
--------------
Stick to a Simple Fiscal Rule
--------------
6. (C) With the government spending to GDP ratio already
down to about 44.5 percent - below the OECD average -- and
close to the U.S. figure of about 38 percent if defense
spending is taken out of the calculation, Fischer maintained
that it would actually be unreasonable for an Israel steadily
growing at a three to five percent clip to keep yearly
expenditure increases to 1.7 percent for much longer. He
said that more important than the growth figure itself, which
could even be three percent as far as he was concerned, was
the need to establish a simple fiscal rule to arrive at a
figure and then stick to it. He said that sensible -- but
too complicated -- formulas must be avoided.
--------------
2.5 Percent Figure Likely
--------------
7. (C) Fischer said that at the JEDG last year, the GOI
tossed out a "Trojan Horse" regarding its goal for the growth
figure when it noted the intent to steadily increase the
defense budget by 2.5 percent per year. He speculated that
this is where the future general budget expenditure figure
will probably end up, and added that it is also not high
enough to meet all of the government's recent budgetary
"promises." This will be particularly the case if, as he
expects, there is lower growth than in the past few years.
--------------
OECD Accession Going Well
--------------
8. (C) On the OECD accession process, Fischer said that
Israel is "in good shape on the essentials." The first draft
of Israel's response to the OECD "accession roadmap" was now
being circulated throughout the government and that the
process was going well. The OECD Secretary General with whom
he had just met, also seemed to be pleased with the progress
being made on Israel's accession. On the anti-bribery issue,
the Ministry of Justice is now beginning the process to get
the needed legislation passed by the Knesset. Fischer had no
particular information on IPR, but said that Israel's
TEL AVIV 00000662 003 OF 003
environmental policies are coming under critical scrutiny.
The OECD seems to be satisfied with Israel's capital markets
reforms, but there is a need for a bit more transparency in
the budget process, especially with regard to the MOF's
special powers vis-a-vis other ministries in the government.
Some areas of labor and wage law need to be addressed, as
does the treatment of Palestinian and other foreign workers
in Israel.
--------------
Teams Examining Wide-Ranging Issues
--------------
9. (C) When the Ambassador mentioned Fischer's remark at a
previous meeting that OECD accession would help advance a
reform agenda in Israel, Fischer agreed, noting that there
are many areas in which Israel can use OECD regulations as a
standard of comparison. He said that not all current OECD
members adhere to all existing regulations, but that new
members are expected to. Calling the accession process
"remarkably far-reaching," Fischer noted that the GOI has set
up fifteen teams to work with OECD counterparts on a wide
variety of issues. The economic and financial markets teams
will be led by the BOI, and the Bank will also be represented
on all of the other committees in which its expertise is
relevant. Along with representatives from all interested
government ministries, these teams will also include
observers from non-governmental organizations as well. He
cited as an example that environmental groups will observe
the deliberations of the environment committee. Fischer
added that another positive outgrowth of this process would
be an improvement in inter-ministerial communication within
the GOI.
--------------
Veto of Israeli Accession Unlikely
--------------
10. (C) In response to the Ambassador's query whether he
was concerned that political considerations might cause a
current OECD member to veto Israel's application to join,
Fischer said that while the OECD is a consensus organization,
there is tremendous pressure within it not to veto an
application which clearly merits positive consideration.
Therefore, he did not think that the possibility of a veto
was of concern. With regard to communicating with the USG on
OECD-related issues, Fischer said that the Ministry of
Foreign Affairs expressed the strong preference that the
Embassy in Tel Aviv be the main point of contact. This would
be a general practice; managing contacts with multiple
agencies in thirty member states would simply be impossible.
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES
SIPDIS
SIPDIS
NEA/FO FOR DANIN; NEA/IPA FOR GOLDBERGER, SHAMPAINE,
ZIMMER, SACHAR; EEB/FO FOR DIBBLE; EEB/IFD FOR GARRY; PARIS
FOR USOECD JMCCRACKEN; TREASURY FOR CONNOLLY; NSC FOR ABRAMS
E.O. 12958: DECL: 03/19/2018
TAGS: ECON EFIN PGOV OECD PREL IS KWBG
SUBJECT: BOI GOVERNOR FISCHER -- FINANCIAL CRISIS HAS NOT
YET HIT ISRAEL
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.
--------------
Summary
--------------
1. (C) Meeting on the day after a major decline in stock
markets worldwide, Governor of the Bank of Israel Stanley
Fischer told the Ambassador on March 18 that the world
economy is still closely tied to the U.S. He said that the
Federal Reserve Board and EU Central Banks have both
performed well during the crisis, but expressed irritation
with articles and statements which inflame public sentiment
and erode confidence in the world financial system. Fischer
stated that Asia and Israel have not yet been deeply affected
by the financial crisis, although Israeli exporters have
sought support from the government in the face of the surging
shekel. He was concerned that falling stock prices would
make it harder for companies to raise capital, leading
eventually to declining investment. On fiscal issues,
Fischer said that the GOI has overpromised on spending and
that annual expenditures would have to rise dramatically to
fulfill these promises. The GOI needs to formulate and stick
to a simple fiscal rule to determine its annual spending
increases. He advised the USG to weigh in with its concerns
regarding spending pressures on the GOI and speculated that
the government would ultimately settle on an expenditure
increase of 2.5 percent for 2009. Regarding the OECD
accession process, which Fischer referred to as "remarkably
far-reaching." he said that all was going well. Fifteen
teams have been set up to meet with OECD counterparts to work
on updating Israeli laws and regulations in a wide variety of
areas and the Ministry of Justice is working on passage of
the necessary anti-bribery legislation. Fischer said that
the Ministry of Foreign Affairs wanted Embassy Tel Aviv to be
the point of contact for the USG on all OECD-related issues.
Fischer also discussed the Israeli-Palestinian correspondent
banking relationship (reported septel). End Summary
--------------
World Economy Still Tied to U.S.
--------------
2. (C) The Ambassador met with Governor of the Bank of
Israel Stanley Fischer on March 18, at a time of severe
weakness in the dollar and turmoil in world financial
markets. Fischer said that this crisis is less complex than
some others in recent memory, but said that it is more
important in terms of impact on the global economy. The U.S.
economy is now less dominant than in the past due to the rise
of Asia and the EU, comprising only 22 percent of the world
economy now, compared to 50 percent in 1950. However, the
world has by no means "decoupled" from the U.S. economy and
Israel in particular is very much affected by it. The
present crisis has not yet affected Asia nor had a big impact
in Israel, although exporters have asked for government
assistance in the face of the surging shekel. However, the
worldwide decline in stock prices -- including in Israel
where the market fell four percent on March 17 -- will make
it more difficult for companies to raise capital and likely
lead to reduced investment.
--------------
Central Banks Doing Well
--------------
3. (C) Fischer praised the Federal Reserve Board for its
handling of the crisis and noted that the EU Central Bank has
shown its maturity by responding quickly and properly, in
marked contrast to its handling of past crises. He noted
that the Central Banks had maintained liquidity in the
markets, but were now grappling with the problem of how to
restore confidence in the banking system. He described the
role of a central bank and its relationship to a country's
treasury in some detail, noting that there is a limit to how
many failed institutions a central bank can absorb before it
begins to materially affect the amount of money circulating
in the economy.
--------------
Everyone Should Just Keep Quiet
--------------
4. (C) Fischer also stressed the importance of psychology in
handling a financial crisis of this magnitude, noting that
TEL AVIV 00000662 002 OF 003
the worst thing to do is to fan the flames of public concern.
He expressed particular irritation with statements and
articles which cause panic and erode public confidence in the
worldwide financial system. Regarding recent discussion of
losses in local pension funds, Fischer was not concerned,
saying that this simply reflected the state of the
international financial markets. On the movement of bond
funds, which have been increasing in value as interest rates
have gone down, he said that "they love declining interest
rates, not low interest rates."
--------------
GOI Has Made Too Many Promises
--------------
5. (C) In response to the Ambassador's comment on the
pressure on the government to increase spending, Fischer
noted that all of the government's recent spending
commitments are in the form of promises for the future.
However, at some point, he added, promises have to be acted
on, and a BOI report to be released soon documents that
fulfilling the accumulated promises would require raising
spending by much more than the presently-accepted 1.7 percent
year-to-year increase. In the past, the MOF has succeeded in
"squashing" most demands for increased spending, but that
will become harder to do. Fischer stressed that "the
government's credibility depends on how it deals with
spending." Finance Minister Bar-On is very tough on the
issue and the new Budget Director Ram Belinkov is, if
anything, even tougher. than his predecessor. However,
Belinkov, who, according to Fischer would actually prefer to
lower the 1.7 figure, lacks previous Budget Director Kobi
Haber's diplomatic skills and his tough stance will likely
engender angry reactions. The Prime Minister is aware of the
issue, but Fischer advised the USG to make its views known as
well. He also agreed with the Ambassador's suggestion to
continue to discuss the issue as the JEDG (Joint Economic
Development Group) meeting approaches later this year.
--------------
Stick to a Simple Fiscal Rule
--------------
6. (C) With the government spending to GDP ratio already
down to about 44.5 percent - below the OECD average -- and
close to the U.S. figure of about 38 percent if defense
spending is taken out of the calculation, Fischer maintained
that it would actually be unreasonable for an Israel steadily
growing at a three to five percent clip to keep yearly
expenditure increases to 1.7 percent for much longer. He
said that more important than the growth figure itself, which
could even be three percent as far as he was concerned, was
the need to establish a simple fiscal rule to arrive at a
figure and then stick to it. He said that sensible -- but
too complicated -- formulas must be avoided.
--------------
2.5 Percent Figure Likely
--------------
7. (C) Fischer said that at the JEDG last year, the GOI
tossed out a "Trojan Horse" regarding its goal for the growth
figure when it noted the intent to steadily increase the
defense budget by 2.5 percent per year. He speculated that
this is where the future general budget expenditure figure
will probably end up, and added that it is also not high
enough to meet all of the government's recent budgetary
"promises." This will be particularly the case if, as he
expects, there is lower growth than in the past few years.
--------------
OECD Accession Going Well
--------------
8. (C) On the OECD accession process, Fischer said that
Israel is "in good shape on the essentials." The first draft
of Israel's response to the OECD "accession roadmap" was now
being circulated throughout the government and that the
process was going well. The OECD Secretary General with whom
he had just met, also seemed to be pleased with the progress
being made on Israel's accession. On the anti-bribery issue,
the Ministry of Justice is now beginning the process to get
the needed legislation passed by the Knesset. Fischer had no
particular information on IPR, but said that Israel's
TEL AVIV 00000662 003 OF 003
environmental policies are coming under critical scrutiny.
The OECD seems to be satisfied with Israel's capital markets
reforms, but there is a need for a bit more transparency in
the budget process, especially with regard to the MOF's
special powers vis-a-vis other ministries in the government.
Some areas of labor and wage law need to be addressed, as
does the treatment of Palestinian and other foreign workers
in Israel.
--------------
Teams Examining Wide-Ranging Issues
--------------
9. (C) When the Ambassador mentioned Fischer's remark at a
previous meeting that OECD accession would help advance a
reform agenda in Israel, Fischer agreed, noting that there
are many areas in which Israel can use OECD regulations as a
standard of comparison. He said that not all current OECD
members adhere to all existing regulations, but that new
members are expected to. Calling the accession process
"remarkably far-reaching," Fischer noted that the GOI has set
up fifteen teams to work with OECD counterparts on a wide
variety of issues. The economic and financial markets teams
will be led by the BOI, and the Bank will also be represented
on all of the other committees in which its expertise is
relevant. Along with representatives from all interested
government ministries, these teams will also include
observers from non-governmental organizations as well. He
cited as an example that environmental groups will observe
the deliberations of the environment committee. Fischer
added that another positive outgrowth of this process would
be an improvement in inter-ministerial communication within
the GOI.
--------------
Veto of Israeli Accession Unlikely
--------------
10. (C) In response to the Ambassador's query whether he
was concerned that political considerations might cause a
current OECD member to veto Israel's application to join,
Fischer said that while the OECD is a consensus organization,
there is tremendous pressure within it not to veto an
application which clearly merits positive consideration.
Therefore, he did not think that the possibility of a veto
was of concern. With regard to communicating with the USG on
OECD-related issues, Fischer said that the Ministry of
Foreign Affairs expressed the strong preference that the
Embassy in Tel Aviv be the main point of contact. This would
be a general practice; managing contacts with multiple
agencies in thirty member states would simply be impossible.
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES