Attack on Iran? Maybe Bank of Israel has the answer

Why has Stanley Fischer, the Bank of Israel Governor, been filling his foreign currency reserves with billions of dollars?

What do people do when they fear danger from natural disasters or war on the horizon? They stock up. Canned goods, batteries, water – the usual.

But what do central banks do? The exact same thing. They stock up on foreign currency. In fact, Stanley Fischer, the governor of the Bank of Israel, has been stocking up so much in the past few years, that Israel is now one of the top five countries in the world when it comes to the ratio between GDP and foreign currency reserves. Well over 30 percent.

In March 20098, the Bank of Israel had $29.5 billion in its foreign currency reserves. By January 2012, that number rose to $77.1 billion.

But Fischer has claimed over and over that he doesn’t have Iran on his mind. Here’s what he said to Newsweek over a year ago:

You have raised Israel’s foreign-currency level substantially, to $70 billion. Some commentators have linked that policy to the prospect of a future war with Iran. Is that the case?

No, but there are aspects I want to emphasize. There are standards of calculating how much reserves a country needs … We calculated how much we need and then added something to that because this [global economic] crisis had reemphasized the usefulness of having reserves in a crisis. And secondly, because, as we’ve said, we are in a special geopolitical situation … Israel has been in more wars than most countries in the last 60 years and we have to think about what we would do if we got into a situation like that again.

Recently, the Israeli financial daily Calcalist interviewed [Heb] Director of Market Operations at the Bank of Israel, Andrew Abir, who pretty much said the same thing as Fischer did to Newsweek. Abir is the one in charge of these reserves.

“What I can tell you is that now I sleep much better at night, after we enlarged our foreign currency reserves. I wouldn’t want to enter a situation where we are today, with all the geo-political dangers, at the rate of reserves we had 3-4 years ago. I would feel very uncomfortable with this. One needs to look at the foreign currency reserves as part of the economy’s emergency stock.”

I agree that it’s definitely good planning to prepare for tough times. And those tough times could be indeed the global financial crisis taking another dip, or an earthquake, God forbid.

But there’s something about the accelerated rate of purchase, together with Iran being more and more on the radar,  PM Benjamin Netanyahu’s entering office, and the “geo-political” lingo used that makes me wonder: Does the Bank of Israel know something we don’t?