Ex-Bank of Israel head warns investors lining up to pull funds amid overhaul turmoil

Jacob Frenkel predicts economic ‘catastrophe’ if further judicial legislation advances without consensus, says Netanyahu now ‘on the list of people’ that Moody’s doesn’t believe

Former Bank of Israel chief Jacob Frenkel speaks to Channel 12 on July 28, 2023. (Channel 12 screenshot: used in accordance with Clause 27a of the Copyright Law)
Former Bank of Israel chief Jacob Frenkel speaks to Channel 12 on July 28, 2023. (Channel 12 screenshot: used in accordance with Clause 27a of the Copyright Law)

Jacob Frenkel, a former Bank of Israel chief and ex-chair of JP Morgan Chase International, warned overseas investors were looking to withdraw funds from Israel due to ongoing political turmoil and uncertainty over the coalition’s judicial overhaul plans going ahead.

In an interview Friday with Channel 12 news, Frenkel described a “very sad story” in which Israel’s economic reputation has taken a hit, saying investors once “stood in line” to understand the “recipe” for the country’s success.

“Today, the story is completely the opposite. They are standing in line asking, how can I cancel my investment?” he said after recently returning from a trip to New York City, where many major multinational financial institutions are based.

The Knesset voted Monday to pass a law that prevents Israeli courts from reviewing the “reasonableness” of government and ministerial decisions, amid mass protests and intense public opposition that has included warnings of economic fallout.

A day later, Moody’s Investors Service warned about “negative consequences” and “significant risk” for Israel’s economy, cautioning that “executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability.”

For now, Moody’s still expects the country’s economy to grow at a rate of 3 percent both this year and in 2024, but cautioned that the projection does not “incorporate a negative effect from a prolonged period of social and political tensions.” In April, Moody’s lowered Israel’s credit outlook from “positive” to “stable,” citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary.

A sign for Moody’s Corp. in New York, August 13, 2010. (AP Photo/ Mark Lennihan/File)

Frenkel was asked about a quote by Moody’s CEO Ron Fauber during a closed-door conversation, as reported by Calcalist: “I am furious. Never has a country’s leader lied to me so personally like [Prime Minister Benjamin] Netanyahu.”

Netanyahu reportedly had told the agency not to lower Israel’s rating because his government would pass any judicial changes with broad consensus — though it passed the reasonableness bill in a vote boycotted by the opposition.

“Firstly, an economy can’t work without reliability and trust. You lied once, so you get on the list of people they don’t believe,” Frenkel responded.

In addition to Moody’s, US investment bank Morgan Stanley lowered Israel’s sovereign credit to a “dislike stance,” citing “increased uncertainty about the economic outlook in the coming months,” and US bank Citi told institutional clients that the environment in Israel is “much more tricky and dangerous” due to the overhaul crisis.

Credit agencies are telling Israel to maintain strong institutions, Frenkel said, warning of negative consequences if Israel’s ratings are downgraded.

“Mortgages will be more expensive, the investments will be smaller, economic growth will be smaller, there will be a deficit,” he said.

Prime Minister Benjamin Netanyahu (left) and Finance Minister Bezalel Smotrich attend a vote on the “reasonableness” bill at the Knesset, in Jerusalem, on July 24, 2023. (Yonatan Sindel/Flash90)

He urged Netanyahu to give an interview to Hebrew media Saturday night in order to tell the country: “I am committed to this, that there will be no more legislation without agreements, for as long as I am prime minister, full stop.”

Frenkel also recommended that Netanyahu phone call the White House to stress that point as well.

“I am speaking about the prevention of a catastrophe. The analysis says to stop it. He can stop it,” he stated.

“The whole story with reasonableness, it’s one slice of the salami, and there will be a lot [of overhaul legislation] after it,” Frankel added, which he predicted would be followed by “catastrophe.”

Global credit rating agencies have until now held off on issuing downgrades, as Netanyahu’s government insisted it would make every effort to reach a broad agreement or some form of consensus with the opposition and would not advance unilateral legislation on the judicial overhaul.

Since the reasonableness law was passed, several Likud lawmakers have indicated they will no longer allow the coalition to unilaterally push through overhaul laws.

Political uncertainty around the government’s proposed judicial overhaul has seen the shekel weaken by about 10% against the US dollar since it was first announced in January. As it became increasingly clear the coalition would move ahead with legislation, Bank of Israel governor Amir Yaron warned earlier this month that further shekel depreciation may result in higher borrowing costs, hitting citizens directly in their pockets.

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