If there’s one thing international markets love, say economists, it’s stability — knowing what to expect and when to expect it. And if there’s one thing they loathe, it’s the opposite. Unfortunately for Israel, the effects of the “resignation” of Leo Leiderman Friday as the next governor of the Bank of Israel, the second such withdrawal of a candidacy in the space of barely a week, evidences instability — and if a credible leader is not appointed soon, it could hurt the country in a big way, experts said .
In an interview, a senior economist at Barclays Plc in London, Daniel Hewitt, said the lack of a governor at the central bank was bad for Israel. “It’s going to take a while to settle this now,” he said, “and it’s going to lead to a period of uncertainty.”
In what the international business media has begun to term a “saga,” Leiderman, the government’s second nominee for the post of Bank of Israel governor, resigned late Friday. In an interview Saturday night, he said that the experience of Jacob Frenkel, the first candidate to replace former BOI governor Stanley Fischer, was enough to keep him in his present post as chief economist at Bank Hapoalim.
According to Hebrew media reports, Leiderman’s decision came after advisers told him that he was likely to face the same kind of media treatment Frankel did over an accusation of shoplifting eight years ago. The reports said that anonymous parties had filed complaints against Leiderman with the office of former Supreme Court justice Jacob Turkel. The nature of the complaints was not revealed. A report on Israel Radio Sunday said that Leiderman had done work with Deutsche Bank and had signed a nondisclosure agreement, which he had been told he would have to violate if a vetting committee insisted on knowing about his activities there.
The effects of Leiderman’s decision began to make themselves felt almost immediately: Over the weekend, Israel’s five-year credit-default swaps (a sort of insurance that investors pay in order to protect themselves from a default) rose. The increase was relatively small — 0.66 basis points (the premium is now 111.66 basis points, or about 11% of the value of the bonds Israel is selling on international markets), indicating that investors are slightly more nervous about the safety of investments in Israel.
But this could just be the beginning of long list of negative effects, say analysts, unless the government manages to find a credible leader for its central bank. Further consequences of a perceived lack of strong leadership at the top, said economists, could entail Israel’s having a harder time selling debt (bonds) on the international market; and the lack of a leader who can keep the value of the shekel at a relatively reasonable rate against the dollar could badly hurt Israeli exporters.
That latter issue could have very detrimental effects on the economy, according to Zvika Oren, chairman of the Israel Manufacturers Association. Oren on Sunday called on the government to make appointing a BOI governor a top priority. “Without economic leadership to deal with the exchange rate crisis, the Israeli economy could slip into a maelstrom of layoffs and loss of export markets,” he said. “The bank must immediately increase its involvement in regulating the exchange rate in order to halt the increase in the value of the shekel, both by continuing to lower the interest rate and by purchasing foreign currency.”
The association, which represents many exporters, makes frequent calls for greater involvement in the exchange rate issue, but this time, said Yonatan Schindler, an attorney who specializes in international financial issues, the organization has a point. “In the past, the BOI took action when necessary in order to keep the value of the shekel lower. Stanley Fischer was very good at determining the balance between the shekel’s strength and the needs of exporters. Without a strong leader, the value of the shekel could drift upwards, as the bank’s temporary leadership could hesitate to buy too much foreign currency or cut interest rates.”
Israel’s relatively high interest rates attract foreign currency investments, which increase the value of the shekel, since more foreign currency needs to be converted into shekels in order to invest in Israeli paper. As the value of the shekel rises versus foreign currency, exporters have a harder time selling abroad, because they get fewer shekels for the fixed foreign currency prices (usually dollars or euros) they can sell their products for abroad.
The most common solution to this dilemma — encouraging foreign investment while flattening the value of the shekel — is to either cut interest rates (but not too much, as Israel wants to remain competitive as a destination for foreign investors) or to buy foreign currency (thereby obviating the effects of excess foreign currency on the value of the shekel). Both are the job of the BOI, and both require finesse and expertise, with the BOI governor doing one or the other, both, or neither, depending on circumstances, said Schindler.
Currently governing the bank is Karnit Flug, said to be Fischer’s preference for permanent chief, but whom Netanyahu does not plan to appoint – either because he does not share her economic vision, or because of personal issues, or both. (Flug wrote an article denying that Netanyahu had a major role in Israel’s economic recovery in the 1990s, after the inflation and high interest rates that had plagued the country.)
According to reports, Netanyahu and Finance Minister Yair Lapid are trying to get Eugene Kandel, director of the National Economic Council, to take the job. It’s not clear that Kandel wants it, but Netanyahu is said to be confident that a new, credible governor will be in place at the Bank of Israel by the end of next week.
Either way, say economists, the issue needs to be resolved soon — or the international markets will come up with their own response.