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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?

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    1. zvi

      Any idea what foreign currency the Bank of Israel is buying? I personally would be cautious about holding on to huge amounts of US dollars!

      Many years ago I read a fascinating and very detailed article in the Israeli press about how Iran was printing counterfeit US $100 bills to the tune of some $200 BILLION annually. The bills were so good that they were virtually undetectable (which is why the new bills were introduced), but the affair was not widely reported on because something like 95% of global foreign reserves are held in US $100 bills! These bills were apparently what Iran used to pay for their military programs…. Oh the irony of it all!

      Reply to Comment
    2. @zvi – interesting!
      As far as I know, the majority of purchasing was USD.

      Reply to Comment
    3. AIG

      Let’s be serious, governments do not buy stuff with cash. The Iranians paid for their military programs with revenue from selling oil, not printing dollar bills.

      As for main the reason Israel’s central bank is buying dollars, it is to weaken the Shekel and make Israeli exports more profitable.

      Reply to Comment
    4. Philos

      AIG, you appear to be as good at financial economics as your namesake.
      The barter economy is something of a distant for Iran, and the Iranians pulled a trick out of the playbooks used by both Saddam Hussein’s Iraq and North Korea.
      Not to mention the vast criminal empires in Latin America, the former Soviet Union, South East Asia and in parts of Europe.

      Reply to Comment
    5. @AIG – indeed, that is what the BOI has been saying all along – that it is to weaken the shekel. Yet that attempt has not only failed, it has put a great deal of our money at risk, and Fischer has been critiqued many times that his gambling is not bearing fruit.

      Reply to Comment
    6. AIG


      The question that needs to be asked is where the Shekel would be without the intervention, and it would be much stronger to the detriment of Israel’s economy.

      Frankel is the central bank leader who has produced the most growth in jobs in the world according to businessweek and who has managed to keep Israel’s GDP growing at a fantastic rate while keeping inflation in check. I would rather thank him than critique him.

      Reply to Comment
    7. @Aig – you mean Fischer. And although he is revered in an almost God-like fashion by many, you included, there are just as many who see his drawbacks.

      Reply to Comment
    8. having said that – this post isn’t a post mortem of Fischer’s achievements or failures. This is about an issue that has been raised by many economists, not only in Israel. It’s not something I’m making up.

      Reply to Comment
    9. AIG

      Yes, I of course meant Fischer.
      I trust his judgement based on his track record and so I am inclined to believe he is doing the right thing in this case also. There will always be second guessers.

      Reply to Comment
    10. @shaul – I’m not saying you’re wrong. In fact, I’m not sure it has to be an either/or issue. I’m just saying there’s something about the timing of things and the terms being used. Something to think about.

      Reply to Comment
    11. Danny

      @Ami: It’s quite simple – the Dollar is cheap. That’s the main reason why it’s good to buy it now. Why is it cheap? Because The Bernanke made it cheap by keeping interest rates at 0%. Eventually, The Bernanke will raise interest rates and the Dollar will become more expensive. And then, The Fischer will receive the Israel prize for his astute monetary policy.
      So, to answer your question – The Fischer cares about The Bernanke, not about Iran.

      Reply to Comment
    12. @danny – if only it were that simple.

      Reply to Comment
    13. “Does the Bank of Israel know something we don’t?”
      Is this a ‘conspiracy theory’?
      I’m not saying the questions raised are not worth raising. Or speculating about.
      I’m simply referring to a recent post by Noam Sheizaf that might be interpreted as alluding that being a “conspiracy theorist” is somehow beyond the pale.

      Reply to Comment