The meeting between Prime Minister Benjamin Netanyahu and Governor of the Bank of Israel Amir Yaron yesterday was like a poker game. The conversation mainly concerned the question of whether or not Yaron’s term, which ends in December, will be extended. Predictably, no decision emerged.
"The prime minister and the governor of the Bank of Israel discussed economic matters today, among other things the extension of the governor’s term, and agreed to make a decision after the Jewish holidays," the press release following the meeting said. Senior sources familiar with the details said that Netanyahu would try to defer the decision until closer to the last minute. The prevailing view is that Netanyahu would prefer to see at the head of the central bank someone who would show greater willingness than Yaron to come into line with the coalition’s policies, particularly over the judicial overhaul. But it isn’t quite so simple.
Yaron is perceived on overseas markets and by the credit rating agencies as a professional watchdog. Netanyahu understands the concrete risk to the shekel and to Israel’s sovereign rating very well, should he inform Yaron of his intention not to extend his term without having a replacement of at least Yaron’s international repute lined up. That would also add fuel to the street protests against the government. In the background are this week’s hearing in the High Court of Justice of the petitions against the law abolishing the reasonableness standard in judicial review of ministerial decisions, the fear of a constitutional crisis, and the decision by Moody’s on Israel’s rating due next month. Netanyahu apparently wants things as quiet as possible on the Bank of Israel front.
Does that mean that Netanyahu will ultimately keep Yaron in the governor’s seat? Not necessarily. One of the scenarios put forward yesterday is that Netanyahu wants to gain time and greater room for maneuver. Some wonder whether he will delude Yaron into thinking that he is considering favorably the possibility of extending his term.
Yaron himself had already said that he would announce "around the holiday period", i.e., in the next few weeks, whether he wanted to say in the job. If Netanyahu conveyed positive messages to him in their meeting, and if we perhaps also see press briefings by "sources close to the prime minister" describing the meeting as successful and speaking of the possibility of a further term, that might persuade Yaron to announce that he wants to stay on.
At the very least, that would give Netanyahu more breathing room vis-à-vis the foreign financial institutions. An announcement of Yaron’s reappointment could also strengthen the shekel, in a continuation of the volatility we have seen in exchange rates recently in response to local political developments, such as in the short-lived reports of talks on a compromise over the judicial overhaul, which led to a strengthening of the shekel against the US dollar, followed by an immediate weakening when these hopes were dashed by the fierce objections expressed by various senior figures in the coalition.
Meanwhile, the prime minister and his people can continue talking to possible candidates to replace Yaron. Among those with whom Netanyahu’s economic adviser Avi Simhon has been in touch are Israeli-US economist Prof. Efraim Benmelech, and Prof. Ori Heffetz, who was one of the government’s economic advisers during the Covid pandemic. If that doesn’t work out, Yaron’s term will be extended. In principle, an extended term would be for a further five years, but the assessment is that even if Yaron remains, it will be for a partial term.
Will Yaron get the blame?
In this poker game, there could also be another scenario. Netanyahu is an expert political cardsharp, certainly more than Yaron, who has spent most of his career as an academic. One theory that has been raised is that Netanyahu has his eye on the blame game. If Netanyahu intimated to Yaron at their meeting that he did not intend to extend his term, he may be laying the groundwork for a public narrative to the effect that it was Yaron who decided to leave. In that event, the blame for the economic blow liable to ensue would be laid at Yaron’s door and the prime minister would be cleared of responsibility for the situation.
Whatever the intentions, it is to be hoped that this saga will reach its end soon and will not be drawn out until after the holidays. There are three months left before Yaron’s current term expires. These months are critical for the Israeli economy in many respects. It’s important that more unnecessary question marks should not be added that will unnerve the markets. At least on the question of the governorship of the Bank of Israel, the government could provide certainty almost immediately.
Published by Globes, Israel business news - en.globes.co.il - on September 11, 2023.
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