Fischer slams tycoons' debt arrangements

"A bond is a loan that must be repaid," the Governor of the Bank of Israel told the Herzliya Conference.

"The global economy is on the brink of recession," Governor of the Bank of Israel Stanley Fischer warned today in his speech at the Herzliya Conference, in which he commented on the global economic crisis and its implications for the Israeli economy. Fischer attacked Israel's business magnates for their debt settlements, and also the banks for their complaints that a credit squeeze had been caused in the economy by the Bank of Israel's higher capital adequacy requirements.

"The International Monetary Fund predicts 3.3% growth in the global economy this year, and when I was at the IMF ten years ago we considered 3.5% growth in the global economy as the borderline between normal growth and recession. We are on the brink of a global recession," Fischer said.

Commenting on the European debt crisis, Fischer said that the creation or avoidance of a financial crisis was of high importance. "The big question is whether there will be a recession in Europe or whether we are facing a financial crisis. If there is a financial crisis in Europe, so many things could happen, such as Greece going bankrupt, or actually leaving the euro bloc, with other countries following after. It's hard to know. The good part of the story is that they realize that they too don’t know what will happen to them if they keep the current framework. I was certain when I returned from the IMF Annual Meeting that the situation was difficult and bad, and they that didn’t understand what was happening there. Meanwhile, the European Central Bank has taken creative steps to deal with the liquidity and debt problem. There's an improvement, but there is still uncertainty."

Turning to Israel and the projection that the fiscal deficit will be higher than 3% of GDP this year, Fischer said, "If the deficit rises because there's a fall in growth, then that's acceptable. But if we expand the deficit because we expand spending, and because there are elections and there's pressure to spend, then that's not good, and unacceptable, and it's not worth doing it."

The Governor of the Bank of Israel also took a swipe at the banks that are complaining of a credit squeeze because of the Bank of Israel's requirement that their capital adequacy ratios should be raised, and addressed himself directly to Israel Discount Bank chairman Yossi Bachar who spoke before him: "Yossi Bachar wants to send me messages, and finds it more convenient to use this stage. That's fine. He wants to tell me that the capital adequacy ratio must not be raised. So I say to him: the Bank of Israel must not avoid raising it. There is the question of the rate of increase; we are aware of the problem, and I'm not fond of the expression 'choking credit', because that creates an unpleasant feeling, as though I'm strangling something, and I find that distasteful. We are aware of the problem."

Fischer did not spare Israel's business magnates, against the background of the wave of debt arrangements, saying, "Non-bank credit is half of all credit. I think that a problem is developing with bonds and debt arrangements. On the Israeli capital market they don't understand the significance of this, and I want to remind people that a bond is a loan that must be repaid."

On the slowdown in the real estate market and claims that the Bank of Israel will again inflate the real estate bubble through its interest rate cuts, Fischer said dismissively, "Now they are telling us 'You are cutting the interest rate again; you will generate a price rise once more.' That's not correct, because we have considerably restricted the conditions for receiving a mortgage."

After the tycoons and the banks, Fischer found time to criticize the haredim (ultra-orthodox Jews): "I respect Judaism," he said, "but this must change, the situation in which the haredim, the fastest growing section of the population, does not participate in the workforce. Fewer than 40% of them work. This cannot continue, and it must be stopped. If it continues in the long term, it will be very hard for the economy to provide what people expect: life at a respectable standard. This is the challenge for the medium term."

Published by Globes [online], Israel business news - - on February 1, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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