Ex-Bank of Israel chief slams PM for ignoring warnings on overhaul’s economic danger

Jacob Frenkel, who later chaired JP Morgan’s international business, says PM shouldn’t brush off concerns expressed by US banking giant: ‘There’s a danger of losing everything’

Former Bank of Israel governor Jacob Frenkel speaks to Channel 12, January 22, 2023. (video screenshot; used in accordance with Clause 27a of the Copyright Law)
Former Bank of Israel governor Jacob Frenkel speaks to Channel 12, January 22, 2023. (video screenshot; used in accordance with Clause 27a of the Copyright Law)

Jacob Frenkel, a former Bank of Israel chief who until recently chaired JP Morgan Chase International, on Saturday warned of the negative impact of the coalition’s far-reaching plans for overhauling the judicial system, and lambasted Prime Minister Benjamin Netanyahu for disregarding international economic institutions’ concerns about the plans.

“I’m very surprised” by what Netanyahu is doing, he told Channel 12 news.

“When JPMorgan makes a recommendation — take it very seriously,” Frenkel said, referring to a company internal memo released Friday, which warned of the growing risk of investing in Israel.

JPMorgan manages over $3 trillion worldwide.

Many have compared Israel’s situation to Poland, including the JP Morgan memo, and Frenkel said this underlines the likelihood that “the situation could deteriorate.”

In the case of Poland, “its credit rating dropped; citizens were harmed; prices went up; its capacity to borrow money on the international markets was reduced,” he said. “Countries that have weakened their judicial oversight are the countries where the citizens have suffered.”

“The prime minister I worked with was careful, cautious, did not take chances… It’s very dangerous to say I’m ignoring the professional reports of the relevant bodies because I think differently,” said Frenkel, who chaired the Bank of Israel from 1991-2000.

When it was put to him that critics are blaming economic doomsayers for causing the very harm to the economy that they are warning about, Frenkel responded: “Oh come on, when you see a fire, and there are firefighters next to it, do you blame the firefighters for the fire?”

“I want to avert the fire… We’re issuing warnings… This prime minister has led Israel to astounding achievements. So there is a great deal to lose,” he said.

In this August 16, 2019, file photo, the logo for JPMorgan Chase & Co. appears above a trading post on the floor of the New York Stock Exchange in New York. (AP Photo/Richard Drew)

The emergency is not here yet, but “there is a danger of losing everything that has been achieved,” he said. If it happens, “it will happen much faster than you’d think.”

For the public, “this is not the time for panic. This is the time to demand that the [warning] opinions be heeded. This is not how you carry out a reform,” Frenkel said.

“Netanyahu and I carried out a reform of Israel’s foreign currency market,” he recalled. “It was done gradually, with fieldwork, transparency, and a process. Not deep, fast, now! What is this?” he asked.

Frenkel was asked about the network’s report that Netanyahu has designated his longtime confidante, Strategic Affairs Minister Ron Dermer, to speak with international financial firms and credit rating agencies that have expressed concerns over how the judicial shakeup could negatively impact the economy.

Channel 12 news described the move as unusual, as such talks are usually handled by Finance Ministry officials and not political figures.

“It shows contempt for these organizations… They’re issuing warnings,” Frenkel said.

Strategic Affairs Minister Ron Dermer arrives for the weekly cabinet meeting at the Prime Minister’s Office in Jerusalem on January 29, 2023. (Yonatan Sindel/Flash90)

Frenkel has previously come out against the judicial overhaul, including in a joint op-ed last month with fellow Bank of Israel governor Karnit Flug in which they warned it could negatively affect Israel’s credit rating and “deal a severe blow to the economy and its citizens.”

On Friday, the Kan public broadcaster reported that Netanyahu has personally called international credit ratings firms in an attempt to tamp down mounting concerns about the economic impact of his government’s judicial proposals.

Netanyahu initiated the calls with senior leaders of the firms and international banks to try to convince them that the judicial proposals will not damage the economy and do not justify downgrading Israel’s credit rating or withdrawing investments.

Netanyahu spoke to senior leaders at JPMorgan to try to prevent the release of the memo Friday, which came days after the premier pointed to the financial institute and fellow US banking giant Goldman Sachs as evidence that the judicial proposals were not chasing away potential investors.

In the internal memo, JP Morgan cited both the judicial overhaul plans presented by Justice Minister Yariv Levin, as well as an increase in “geopolitical hostilities.”

JPMorgan flagged the possibility that the judicial shakeup could put negative pressure on Israel’s credit rating, which it said currently “stands comfortably in the investment grade bucket,” potentially slowing the flow of international investment.

The bank stressed, however, that it expects “the market impact of that to be limited.”

A source close to Netanyahu derided the report as “spin” and said many commentators aren’t knowledgeable about the actual proposals.

“A thousand reports like this won’t help. People will see if it’s worth investing or not,” the source said. “The smart money will come in because what we’re doing is balancing an unbalanced situation. The justice system will remain independent like today, the ‘judicialization’ will decrease and the economy will flourish.”

In this handout photo, Prime Minister Benjamin Netanyahu meets with French businessmen during his visit to Paris, February 4, 2023. (Amos Ben Gershom/GPO)

Netanyahu, who was in France this weekend at the end of an official visit, said that he’d met with 60 French business people, who told him, “What they’re saying about investors running away is nonsense. We want to increase our investments in Israel.”

The proposals presented by Levin in December would sharply restrict the High Court’s capacity to annul laws and government decisions with an “override clause” enabling the Knesset to re-legislate struck-down laws with a bare majority of 61; give the government complete control over the selection of judges; prevent the court from using a test of “reasonableness” to judge legislation and government decisions; and allow ministers to appoint their own legal advisers, instead of getting counsel from advisers operating under the aegis of the Justice Ministry.

Last week, Goldman Sachs cautioned that the “growing concern over domestic political developments” puts a focus on the exposure of the shekel.

“The five most recent elections over the past three-year period have had typically limited read-through to financial markets,” Goldman Sachs economist Tadas Gedminas wrote in a report. “This is not to say that the current situation could not have a more meaningful impact this time around, and we will closely monitor ongoing developments.”

“That said, we think these structural changes and their implications for financial markets are underappreciated,” Gedminas warned.

Domestic finance institutions have also been vociferous in their concerns that Levin’s plans may negatively impact the country’s economy.

Economy Minister Nir Barkat sought to calm fears on Wednesday, telling the Cybertech Global conference in Tel Aviv that when speaking to contacts abroad, “this issue isn’t even mentioned.”

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