US embassy cable - 05TELAVIV170

UNCLAS SECTION 01 OF 03 TEL AVIV 000170 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, IS, ECONOMY AND FINANCE, GOI INTERNAL 
SUBJECT: Fischer Accepts GOI Offer to Be Next Governor of 
the Bank of Israel 
 
This cable is classified Sensitive but Unclassified.  Please 
handle accordingly. 
 
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Summary 
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1. (U) On January 9, Prime Minister Sharon and Finance 
Minister Binyamin Netanyahu jointly nominated 
Professor Stanley Fischer as the next Governor of the Bank 
of Israel.  Fischer accepted the nomination the same day, 
although it will require further administrative and 
political approvals, including by the Cabinet and the 
President of Israel.  The announcement that a non-Israeli 
was being offered such an important economic post created a 
media furor, although none of the critics of the decision 
deny Professor Fischer's accomplishments and achievements. 
Those who support the nomination, including the Prime 
Minister and the Finance Minister, believe that the 
nomination will reap fruit in terms of encouraging 
investment, and boosting international recognition of the 
Israeli economy in the era of globalization.  End Summary. 
 
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And the Envelope Please... 
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2. (U) With David Klein's term as Governor of the Bank of 
Israel ending on January 16, readers of the local press were 
treated to several weeks of speculation regarding the 
identity of the next Governor.  According to press reports, 
none of the candidates proposed by the search team made up 
of the Director General of the Prime Minister's Office and 
the Finance Ministry were acceptable to both institutions. 
As a result, it appeared increasingly likely that Dr. Klein 
would be appointed to a second term as a "compromise 
candidate." 
 
3. (U) It turned out that a compromise candidate was found, 
but it was not Klein.  Finance Minister Netanyahu told radio 
station Kol Israel on January 10 that he had felt it was 
unlikely that someone of Fischer's status would agree to 
accept the position, and that only on the Sunday morning 
before he and the Prime Minister were supposed to meet to 
make a final decision did Professor Fischer agree to accept 
the position.  Netanyahu said both he and the PM agreed that 
having Fischer at the BOI was a golden opportunity for the 
Israeli economy. 
 
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Appointment of "Outsider" Raises Shekels 
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4. (U) Israeli press play was fairly homogeneous, with 
commentators simultaneously highlighting Fischer's gold- 
plated economic credentials while criticizing the selection 
of a non-Israeli for such a key position here.  Most 
articles noted that, although Fischer was one of the 
architects of the 1985 Economic Stabilization Plan, which 
brought inflation down from more than 400% in that year to 
the double digits, he does not speak fluent Hebrew, and is 
naturally not completely versed the political and economic 
forces at play in Israel.  Sever Plotzker, Economic Editor 
of Yedhiot Achronot, stressed that, although Fischer "is not 
familiar in depth with the Israeli economy, speaks only 
basic Hebrew," ... the fact that he "consented to accept the 
post of Governor of the Bank of Israel and give up a salary 
worth millions of dollars and a senior position in an 
American financial institution, sends a highly optimistic 
message about the Israeli economy...  Although it would have 
been better to have an Israeli governor for Israel's central 
bank, we will accept him as a new immigrant with open arms." 
 
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Fischer's Views on the Israeli Economy: 
Watch that Budget Deficit 
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5.  (U) Fischer outlined his economic views at Tel Aviv 
University on November 30, when he was in Israel for the 
jubilee celebration of the Bank of Israel.  Almost to a one, 
they reflect positions championed by Finance Minister 
Netanyahu.  Fischer criticized the centralization of 
interest rate decisions in the hands of the BOI Governor, 
and argued that a monetary policy committee should make such 
decisions.  He cited an ideal inflation rate of around 2 
percent, noting that a negative deviation can be as serious 
as the opposite.  (Note: This appears to have been a 
negative reference to the tight monetary policy pursued by 
Klein, which led to negative inflation in 2003).  Regarding 
taxes, although he did not refer specifically to Israel, he 
indicated that the global trend is reducing tax rates.  He 
felt that Israel needs to take a more serious and systematic 
approach to social welfare.  He is in favor of the Bachar 
capital market reforms. 
 
6.  (U) Regarding the Israeli fiscal framework, Fischer 
argued that the budget deficit remains too large as a result 
of a bloated public sector and inflated defense burden.  He 
spoke strongly in favor of implementing economic reforms. 
Fischer is also known for his belief that there is no growth 
without peace. 
 
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Positive Reactions from Economic Circles 
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7.  (U) Professional economists almost universally approved 
of the Fischer appointment, quickly issuing comments January 
10.  Former BOI governors were especially effusive.  Yackov 
Frankel told Haaretz that "This is an excellent nomination 
of a man who is a first-rate professional and who has 
decided to immigrate to Israel and lead the Bank of Israel." 
Frankel added that he is convinced that Fischer will 
maintain monetary stability, while promoting sustained 
economic growth.  Former BOI Governor Arnon Gafni reminisced 
to Kol Israel about Fischer's key assistance in bringing 
down Israeli inflation in the mid-1980s.  He said that 
Fischer is one of the finest economists in the world, as 
well as a loyal Jew.  Klein himself, whom one MoF official 
said took the news as "the real gentleman he is," noted 
Fischer's status as a "first-rate economist," and said that 
Israel will benefit from Fischer's broad connections. 
 
8.  (SBU) The private sector was also pleased by the 
announcement.  One mission contact, head of economic 
research at a major Israeli bank, told us he was "very happy 
and surprised" by the nomination.  He noted "foreign 
financial institutions will be very pleased by the 
appointment."  He said he expected Fischer to stress the 
importance of fiscal stability.  Although Fischer was likely 
to work well with Netanyahu and other politicians, he was 
likely to be "tested" by the Knesset Finance Committee in 
his role as economic advisor to the government.  This 
contact said he expected Fischer to call on his extensive 
international contacts to support his policy positions, and 
would put these contacts to good use in upcoming policy 
battles. 
 
9.  (SBU)  Another mission contact, the head of an 
international bank's Israel office, told us he expected 
Fischer to do well as Governor, both domestically and 
internationally.  He had sat in on a number of meetings 
between Fischer and PM Sharon, and noted "Sharon listens 
when Fischer speaks."  Internationally, Fischer possessed 
immense credibility.  Finally, he noted, domestic and 
international banks operating in Israel were certain to find 
out soon that there would be "no more bullshitting the 
Israeli regulators..." 
 
10.  (U) Ohad Marani, Former Director General of the Finance 
Ministry, told Kol Israel that in spite of the predictable 
initial criticism, he thinks that this will be one of the 
most successful appointments by the State of Israel.  He 
noted that Fischer's ability to integrate the theory and 
practice of economics will result in his being a very 
successful Governor.  Marani stressed that, although Fischer 
is an "American import," Israelis recognize American talents 
in all possible areas - academic, business, art, sport, as 
well as economic. 
 
11.  (U) Perhaps the most objective observer, the stock 
market, racked up immediate gains following the nomination. 
The dollar has remained stable. 
 
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Political Echelon: Mixed Reviews 
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12.  (U) The reaction to the news was more heterogeneous 
within the political sphere.  Labor Party leader Shimon 
Peres, who worked closely with Fischer at the time that the 
1985 Stabilization Program was implemented, expressed wide 
support for the appointment in a January 10 interview with 
Kol Israel.  Peres noted that the nomination of a non-Israel 
was not uncontroversial, but reminded listeners of the many 
prominent Israeli immigrants. 
 
13.  (U) Even MK Amir Peretz, Netanyahu's nemesis, appeared 
to be open-minded.  He is pleased that Fischer understands 
the connection between peace and economics, and said that he 
hopes he will be able to resolve economic-social issues. 
Peretz said the test will be whether Fischer succeeds in 
reducing the income gaps in the society. 
 
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Naysayers 
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14.  (U) Former Shinui Party Minister of the Interior 
Avraham Poraz strongly opposed the nomination, saying that 
it was unacceptable for a non-Israeli to hold such an 
important position. He noted that, although Fischer is 
Jewish, he did not immigrate, did not serve in the army, nor 
did his children, and although he may be a fist-class 
economist, he was divorced from the average Israeli 
experience. 
 
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Fischer's Challenges 
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15.  On the policy front, Fischer is likely to face at least 
three basic challenges: 
 
Philosophy:  Fischer will have to decide whether the Bank's 
effort to maintain price stability should be leavened with 
the political objective of job creation.  Although Klein and 
Netanyahu agreed on the importance of using monetary policy 
to battle inflation, Netanyahu felt Klein's conservative 
financial stance was too harsh.  Now that the Labor Party is 
in the government, the pressure to lower the 10 percent 
unemployment rate and to act on the hot button issue of an 
increased poverty index will increase further. 
 
Independence:  The Bank is independent and the Governor 
retains sole decision-making of the interest rate and money 
targets. The Finance Ministry and Klein have sparred on who 
can be primary dealers of government bonds. Finance will 
continue to push to establish a committee with outside 
members chosen by the government to make interest rate 
decisions.  Klein strongly opposed such a step, but it 
appears likely Fischer will be more amenable to working out 
a modus vivendi. 
 
Labor: Klein has tried to tie BOI staff compensation to 
performance and to ensure bank workers are putting in the 
hours they are supposed to and are doing appropriate work. 
For this he got a union revolt with epithets written on the 
bathroom walls. The labor strife with the bank's highly 
compensated workforce will continue if the next governor 
tries to bring the bank into the 21st century. 
 
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Biographic Information 
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16.  (U) Fischer is: 
- 61 years old; 
- Born in Zambia, 1943; 
- Currently serving as Vice Chairman of Citigroup, joined in 
2002; 
- First Deputy Managing Director of the IMF, 1994-2001; 
- Head of the Economics Department at MIT, 1990-94; 
- Chief Economist World Bank, 1988-1990; 
- Adviser to GOI in 1985; helped draft that year's Economic 
Stabilization Plan; 
- Was a visiting senior lecturer at Hebrew University, long- 
standing connection with the Bank of Israel; 
- Assistant Professor of Economics, University of Chicago, 
1969-73; 
- Doctorate in Economics from MIT, 1969; 
- Studied at London School of Economics, 1962-66. 
 
 
Kurtzer