The following is an extract from an extended personal interview with Governor of the Bank of Israel Amir Yaron published in "Globes" weekend magazine "G".
"We realized very early on, in late December-early January, that an unprecedented event was unfolding, and we began analyzing its implications. At that point, it was hard to predict the scale it would reach, but we had all kinds of scenarios for its force and depth. Today we see that it is taking China a long time to emerge from this, so the potential damage is great, although we can already state that as far as the stability of the banks is concerned the blow will not be severe.
"We're talking about a dynamic event that began as a health event and turned into an economic event, accompanied by great uncertainty as to how long it will last and how widespread the contagion will be. The bank worked determinedly and fast, we intervened where necessary, and the markets did in fact calm down.
"From the first moment it was clear to me that we had to help, and fast. Before the crisis, I was one of those who remarked that we had a debt:GDP ratio of 60%, that we had behaved with fiscal responsibility, with a fiscal deficit of slightly over 4% of GDP, but that we needed a government that would reduce the deficit in order to stabilize the debt:GDP ratio, and not everybody liked that. Nevertheless, when the event broke, we very quickly realized that it was necessary to help households and businesses that were frozen. What does a central bank do? It supports liquidity, it helps ensure that the markets function, and, in normal recessions, it cuts interest rates in order to stoke demand. In this case, stoking demand doesn't help a closed business or a restaurant. You have to help them to get through the next few months, on the assumption that we will manage to lead the economy back to the point at which the crisis began, and to leave ourselves enough degrees of freedom to carry out policy measures, enough ammunition for a long haul.
"Our responsibility throughout this event has been in the area of liquidity and markets. It took more time for all concerned to grasp what aid was required. An economic plan, in the nature of things, and because many people and agencies are involved, takes longer to put together than decisions such as to cut the interest rate or buy NIS 50 billion worth of bonds. But it will be carried out: legislation in the Knesset, forming a fund, getting the whole process moving. Even in the US there are complaints that the aid is not reaching small businesses. All the same, it could have been done faster and more efficiently."
Exit strategy
"Anyone who argues that we should act the same way as in the crisis of 2008 is making a mistake, because there can be no comparison with the coronavirus crisis. 2008 was a financial event in which, whether by luck or good judgment, Israel was not involved, and now it's the opposite. This is a health event that has become an event in the real economy, and so the solution has to come from the fiscal side. The aim is to get through the next few months and to aspire to get the economy moving at a higher level and to take care of households, some of which will say that what we are doing is inadequate. But we have put people on leave without pay and they are receiving unemployment benefit, and the grant to the self-employed will be up to NIS 10,500 so that they will have the wherewithal to live.
"As far as support for business is concerned, we have put in place three planks: refunds of advance tax payments, cancellation of three months of municipal taxes, and postponement of electricity, water and VAT payments, which should generate a degree of liquidity, with a certain amount of government aid and fewer expenses. Some of these things were not dealt with quickly enough. Of the NIS 80 billion that was approved, half is in the form of budgets from the Ministry of Finance, and the rest is payment deferrals and guarantees for funds and loans, altogether 3% of GDP, a good fiscal position in comparison with other countries.
"On the other hand, legislation for the loans and funds took time. At first we used an existing fund that did not include some of the banks, while in the rest of the world the funds were broader and the state guarantees were higher. Here the guarantees amounted to 15%, whereas in Germany the state gives a 90% guarantee and in Britain 80%, which changes the risk for the banks. The higher the guarantee, of a completely different order of size from 15%, the more assistance the banks can give to businesses in cases where there is a fear that when the economy gets going again, they will not manage to get back on their feet. The decision lies with the Accountant General, and there are discussions on the matter all the time.
"The Supervisor of Banks and I summoned the heads of the banks for a chat, we briefed them and explained that if we were strict with the loans and there were business failures, the situation would be worse, and so it was necessary to be lenient and to give credit responsibly and in a balanced way. In their favor it should be said that they were the first to announce loan rescheduling and postponement of mortgage payments, even if at compound interest. We aren't waiting around, and besides cutting the interest rate and massive intervention in the bond market, we see mortgage interest rates coming down from the high level of last week. In our report at the end of March credit to medium-size and large businesses rose to NIS 21 billion, when in a normal month it stands at only about NIS 2 billion, and in addition we agreed to take corporate bonds from the institutions as collateral.
"We take into account that there will be no vaccination for the coronavirus before December, and that it might hit us in a second wave, and so the outlook is a recession, negative growth of up to 5% in 2020 and the start of an extensive return to work in July. In the fourth quarter of the year and in the first quarter of 2021 we will reach greater intensity of work and rapid growth. So in 2020 we will take a hit and at the end of 2021 we'll return to an unemployment level of about 4%."
Published by Globes, Israel business news - en.globes.co.il - on April 16, 2020
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