"The magnitude of the crisis that we are in has not been seen in recent decades. It is undermining accepted axioms, and requires action on an unheard-of scale," Governor of the Bank of Israel Prof. Amit Yaron said in discussion with the government several days ago. Yaron believes that although the supreme interest in the crisis is maintaining public health, "without an economy, there will be no health."
The Bank of Israel is therefore urging the Ministry of Finance to adopt an economic rescue plan that will be presented to the government in the coming days. The plan is designed to provide a horizon of certainty to the private sector through an unprecedented volume of government support. The measures under consideration include a safety net for businesses, expanding the tax exemption, and government measures for generating demand in the economy.
The Bank of Israel understands that the plan depends absolutely on approval by Prime Minister Benjamin Netanyahu and cooperation from the Knesset, without which the required emergency budget cannot be approved.
Changing direction: Yaron against cutting the deficit - "A crisis we have never seen"
Two months ago, when initial reports from China about the outbreak of the coronavirus began, Yaron appointed a monitoring team headed by his deputy, Andrew Abir. A week ago, after the crisis deepened, three more super-teams were appointed within the Bank of Israel to keep track of the markets, the banking system, and the economy.
The first major challenge addressed by the Bank of Israel was in the foreign currency markets. The Bank of Israel's core task in such crises is to make sure that the markets are functioning, and that liquidity exists. The investment institutions were required to increase securities for overseas derivatives, and the market suddenly found itself with an enormous shortage of dollars. The shekel-dollar exchange rate began to soar, and a series liquidity problem was created.
The steps taken by the Bank of Israel were drastic. It purchased billions of shekels of bonds on the secondary market (a measure not taken since the 2008 crisis), and it provided a $15 billion line of credit for short-term loans in foreign currency, using the huge foreign currency reserves accumulated by the central bank in recent years (something that had never been done before). Yaron's main work in recent days conducted in internal discussions with the government. In these marathon meetings, Yaron explained that he, who until the crisis had called on the government to reduce its budget deficit, was now convinced that it was necessary to do the exact opposite now, because the current crisis was unprecedented.
In contrast to the 2008 crisis, the damage is not confined to the financial system; it extends to the entire non-financial economy. It is having a negative impact on the production and supply chains, and is eliminating demand to the same degree, for example among consumers confined to their homes, who are reluctant to spend money out of concern that they will lose their livelihoods. At this stage, the Ministry of Finance devised a plan for partial restoration of the economy after the Passover holiday. Yaron unequivocally supported the Ministry of Finance's view that the economic must not be completely closed down, against the Ministry of Health, which supported hermetic closure, and exerted pressure to allow as many industrial sectors as possible to continue operating.
The costs are expected to be heavy: NIS 50 billion in damage to GDP, a 7% budget deficit, and a steep rise to 70% in the ratio of debt to GDP (the Bank of Israel demanded for an entire decade that the ratio be reduced to its current level of 60%). Yaron also supported measures already taken to support businesses, self-employed, and hundreds of thousands of employees sent on unpaid leave. He believes, however, that the government will have to do far more than this in order to rescue the economy from the crisis afflicting it.
Near future: The economy must resume its operations in May
Yaron's greatest fear concerns what will happen in May, after the plan ends, assuming that the virus is still here. Even if the pace of infection drops to zero, the concern about a renewal of infection is liable to lengthen the paralysis in the economy for an unlimited time. The economy will have to resume its activity in tandem with a combination of stringent safety and enforcement measures that will reduce the risk of infection as much as possible, somewhat reminiscent of the stepping up of security in shopping malls following the terrorist attacks in the second intifada.
Yaron, who is in constant contact with governors of other central banks, is familiar with the grandiose assistance plans announced in the US, the UK, France, Germany, and the other Western countries. As shown by a comparative examination conducted by "Globes," Israel is far behind other Western countries in the amount of money it has undertaken to provide in order to get the economy out of the crisis. For example, the UK undertook to inject £330 billion (15.9% of GDP), and the US is considering doubling its rescue package to $1 trillion - 10% of GDP. The German, Spanish, and French governments announced budgetary expansion amounting to 12-14% of GDP.
In Yaron's opinion, the comparison between the rescue packages announced and that of Israel is misleading, because it does not take into account the fact that the main element in overseas government assistance was promised as loans, not grants, while the Israeli assistance package also includes the heavy cost of unemployment benefits.
Yaron nevertheless argued in the discussions that Israel would have to take many additional steps to get the economic cart out of the mud.
He explained that the measures would have to be selective. For example, he does not support the US idea of sending a $1,000 check to every family. He believes in more focused means for supporting the business sector. A safety net for businesses, a total exemption from taxes, and government measures such as direct support and incentives for increasing demand in the economy are all on the table, and are being evaluated by the teams at the Bank of Israel and the Ministry of Finance. The importance of the plan lies in the message that it delivers to the public, in visibility, and providing a horizon that will enable the business sector to calculate its steps.
This plan has no chance of being carried out without backing from the political leadership. The current transition government cannot deviate from the NIS 402 billion 2019 budget framework. Implementation of the plan will therefore require parliamentary cooperation between the coalition and the opposition, assuming that no broad government is formed. More than anything else, Yaron is taking care to maintain his relationship of trust with Netanyahu, who is supportive of Yaron, and yesterday called him a topnotch professional.
Banking system: Conservative, but stable and prepared for money time
Another party supervised by the Bank of Israel, and on which the Bank of Israel is putting reliance to help the economy in the crisis, is the banking system. In recent weeks, the heads of the Bank of Israel met with representatives of the banking system several times and urged them to provide credit to borrowers and other customers who were in difficulties. At the same time, the Supervisor of Banks issued a number of concessions and special regulations for this period, including measures for facilitating the providing of remote services and closing most of the branches for working with the public.
Ostensibly, the central bank believes that the banking system is prepared for the crisis, and will get through it. Sources close to the Bank of Israel explain, "Part of the extreme tests conducted for the banking system included a global epidemic, but not on this scale." It therefore appears that believes that barring unnecessary panic the banking system has an excellent credit portfolio and is stable, and that there is no problem of the large borrowers, as was the case in the past, and that the systems had equity surpluses. "In the past, the banking system was criticized for being too conservative, but the current situation and the banks' stability shows why this was correct," a senior involved source said.
Another aspect of the crisis is the institutional system in its role as a manager of the Israeli public's long-term savings. At the current time, the long-term savings tracks are suffering steep falls. The prevailing idea at the central bank, and outside it, is that the current event will end at some time, so that it is likely that what was learned from past experience will also be valid now - some who invests for the long term, and does not need the money tomorrow, will eventually experience a fine recovery.
Published by Globes, Israel business news - en.globes.co.il - on March 22, 2020
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