null
Carol X Weakley  10/27/2006 12:22:41 PM  From  DB/Inbox:  Carol X Weakley

Cable 
Text:                                                                      
                                                                           
      
C O N F I D E N T I A L        TEL AVIV 04269

SIPDIS
CXTelA:
    ACTION: ECON
    INFO:   IPSC SCI IMO CONS RES POL DCM AMB PD AID ADM
            FCS

DISSEMINATION: ECON
CHARGE: PROG

APPROVED: AMB:RHJONES
DRAFTED: ECON:JNWITOW,EWESTRU
CLEARED: DCM:GCRETZ, ECON:WWEINSTEIN, POL:PVROOMAN

VZCZCTVI533
OO RUEHC RUEHXK RHEHNSC RUEATRS
DE RUEHTV #4269/01 2991406
ZNY CCCCC ZZH
O 261406Z OCT 06
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7215
INFO RUEHXK/ARAB ISRAELI COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 004269 
 
SIPDIS 
 
NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE, 
BELGRADE; EB/FO FOR DIBBLE; EB/OMA FOR GARRY; NSC FOR 
ABRAMS, WATERS; TREASURY FOR HIRSON 
 
E.O. 12958: DECL: 10/25/2016 
TAGS: ECON EFIN PGOV PREL SCRM IS KPAL KWBG
SUBJECT: BOI GOVERNOR SEES EXCELLENT ISRAELI ECONOMIC 
PERFORMANCE DESPITE WAR 
 
 
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d. 
 
------- 
Summary 
------- 
 
¶1.  (C)  Governor of the Bank of Israel (BOI) Stanley Fischer 
told the Ambassador that Israel's economic situation is 
excellent, despite the recent war, which slowed 2006 economic 
growth by about one percent.  Inflation is very low, and the 
.25 percent interest rate decrease on October 23 was meant to 
bring it up into the one to three percent target range.  The 
2006 deficit should be about 2.5 percent of GDP and growth is 
forecast to be in the four percent range.  Fischer said that 
fiscal policy is tighter than it appears, given that the 
Ministry of Finance (MOF) always understates revenues to help 
keep expenditures under control, and added that the results 
of the defense spending review currently underway will have a 
great impact on budgeting decisions in the next few years. 
He indicated that, as far as he knew, MOF DG Yossi Bachar was 
leaving his post for purely personal reasons.  On the 
establishment of the new Economic Advisory Council (EAC) in 
the Prime Minister's office, Fischer expressed great 
enthusiasm and strongly praised its Director, Manuel 
Trajtenberg.  On the proposed BOI Law, Fischer expressed 
great frustration at the impasse over the workers' wage 
demands, and said that the MOF's unwillingness to help solve 
the problem called into question the underlying assumption 
that guided the formulation of the law that an atmosphere of 
goodwill and cooperation would always prevail between the MOF 
and the BOI.  Regarding the Israeli-Palestinian correspondent 
banking situation, Fischer said that a solution is at hand. 
(Note:  the agreement was approved on October 25 by the 
Knesset Law and Justice Committee, but is still subject to 
further deliberation.  End Note).  End Summary. 
 
---------------------------------- 
Overall Economic Picture Excellent 
---------------------------------- 
 
¶2.  (C) In an October 24 meeting at the BOI, Fischer told the 
Ambassador that the overall Israeli post-war macroeconomic 
picture is surprisingly good.  The war caused about a one 
percent decline in annual GDP growth numbers with the worst 
damage being in the third quarter when the Bank expects the 
numbers to show a slight contraction in GDP.  The post-war 
recovery was very fast, with exports undamaged and domestic 
consumption picking up quickly.  While there was some 
short-term contraction in industrial production in the 
northern part of the country, it is the tourism sector that 
will suffer longer-lasting damage.  The housing sector was 
not much affected by the war, but is recovering surprisingly 
slowly from the deep recession earlier in the decade. 
 
------------------------------ 
Defense Spending the Wild Card 
------------------------------ 
 
¶3.  (C) Fischer forecasted that the government will end the 
year with a budget deficit of 2.5 percent of GDP.  The 
deficit is expected to increase next year, but it should 
still come in under the three percent target.  The big 
unknown for next year will be the result of the defense 
spending review.  Fischer is surprised at how many people 
think the MOD can get by with a smaller budget, even after 
all of the post-war talk of the need to increase defense 
spending.  He is of the mind that &if you want more of 
something, you generally need to pay more for it,8 but lots 
of people who claim to be knowledgeable on defense issues 
tell him that there,s a fair amount of waste and 
inefficiency that can be cut. 
 
------------------------------------- 
Fiscal Policy Tighter Than it Appears 
------------------------------------- 
 
¶4.  (C) Fischer thinks fiscal policy will turn out to be 
tighter this year than the numbers seem to indicate right 
now, since the &boys in the Treasury8 like to underestimate 
revenues to help keep expenditures under control.  He is 
"amazed" at how much the targets (set in the 2003 U.S.-Israel 
Loan Guarantee Agreement) do to help keep ministers, 
spending demands in check.  Although a lower deficit would be 
desirable, the MOF is confident the debt-to-GDP ratio will 
continue to fall next year due to revenues generated by the 
continued privatization of government-owned industries, such 
as the Haifa Oil Refineries company.  The BOI forecast four 
percent GDP growth in 2007, taking into account the 
possibility of governmental instability.  Noting, however, 
that the coalition has been "bought relatively cheaply" and 
did not bust the budget, Fischer added that the government 
now appears to be relatively stable.  Therefore, next year is 
likely to be considerably better, barring a global recession 
or a deterioration in the security situation. 
 
----------------- 
Inflation Too Low 
----------------- 
 
¶5.  (C) Calling it "embarrassing," Fischer said that Israel 
will end the year with inflation below the one to three 
percent target range due to the currency,s appreciation and 
falling oil prices.  The Bank debated cutting the rate by 
more than the .25 percent (down to 5.25 percent) announced on 
October 23, but they decided against it because things can 
change so quickly in Israel.  Bigger cuts have been made in 
the past, "but they have always failed." 
 
--------------------------------------- 
Bachar Leaving MOF For Personal Reasons 
---------------------------------------- 
 
¶6.  (C) Responding to the Ambassador's query regarding the 
impact of the departure of Ministry of Finance (MOF) Director 
General Yossi Bachar, Fischer did not have much to say.  He 
noted only that Bachar,s job is &very wearying,8 and 
thinks he is leaving simply because he is tired and wants to 
move on to something else.  He added that Bachar personally 
told him that there is no truth whatsoever to the rumors and 
press reports that he "doesn,t like Hirchson."  Fischer then 
stressed the need to "have someone good in that position" and 
said that there are a lot of talented candidates. 
 
----------------------------------------- 
Positive on New Economic Advisory Council 
----------------------------------------- 
 
¶7.  (C) When the Ambassador raised the issue of Olmert,s new 
Economic Advisory Council (EAC), Fischer called it a "good 
thing" and said that its chief, Manuel Trajtenberg, is a very 
good pick -- a "great researcher" who was mentored by a good 
friend of his.  He said that the BOI will work well with the 
EAC.  Some of his BOI colleagues initially were worried that 
the EAC would infringe on the Governor,s designation as the 
"Economic Advisor to the Government," but since the BOI 
doesn,t design its research program based on the Prime 
Minister,s objectives, the PM needs his own economic advisor 
to work on his priorities.  If Olmert doesn,t have &his own 
guys,8 the &boys at the Treasury8 will rule.  As an 
example, he said that MOF footdragging has prevented Olmert 
from introducing a negative income tax, an idea he has 
championed since his tenure as Finance Minister.  The MOF 
bureaucracy continually came up with reasons why it would be 
a bad idea despite the minister's expressed desire to make it 
happen. 
 
-------------------------------- 
BOI - MOF Relations At Low Point 
-------------------------------- 
 
¶8.  (C)  Regarding the status of the BOI law, Fischer said 
that "nothing is happening with it now."  The negotiations 
are stuck on the issue of wage arrangements for BOI workers, 
and will soon reach a crisis point.  The MOF won,t move on a 
wage agreement, and the workers won,t allow the law to 
proceed without it.  The problem is that the MOF does not 
want to accept responsibility for a wage agreement that would 
result in a large payout to retirees at a time of supposed 
fiscal austerity.  In the end, the retirees will receive some 
of the money they had originally been promised, but the MOF's 
fear of investigations by the press, the State Comptroller, 
the Movement for Quality Government, etc. means that reaching 
an agreement will require the intervention of the PM.  The 
MOF,s attitude towards this dispute is causing Fischer to 
reevaluate some elements of the proposed BOI law, which are 
based on a presumption of goodwill between the BOI and the 
MOF.  He no longer is sure if that can be counted on; &If 
they want to pull my tail on the wages, they can,8 he said. 
Regarding the recent State Comptroller investigation into 
alleged wage improprieties (which involves some current 
employees), he characterized it as &sheer harassment8 and 
is sure the Comptroller will lose the case.  On a positive 
note, Fischer noted that GOI officials -- including those 
from the MOF -- never exert any pressure on interest rate 
decisions and he is given a free hand to control the Bank,s 
policy decisions -- the "things that matter." 
 
-------------------------------------------- 
Israeli-Palestinian Banking Solution At Hand 
-------------------------------------------- 
 
¶9.  (C) In response to the Ambassador's question on the 
status of the Israeli-Palestinian correspondent banking 
issue, Fischer said he thinks it has been resolved, but will 
require some months to implement, even after Knesset 
approval.  (Note:  The Knesset Law and Justice Committee 
approved the agreement on October 25, but it is still subject 
to further deliberations.  End Note).  The holdup was that 
the anti-terror finance people in the Justice Ministry 
originally wanted to require that every single check written 
from a Palestinian bank be cleared against a watchlist, as 
opposed to the requirement in the agreement that only checks 
written for amounts greater than NIS 5000 be subjected to 
such scrutiny.  Implementing this demand would have doubled 
the number of checks scrutinized from 880,000 per year to 
about 1.9 million.  Fischer called this "untenable" and said 
the banks simply would not do it.  He noted that he talks 
frequently with George El-Abed, the Palestinian Monetary 
Authority Governor, and that the Palestinians have been very 
cooperative in already taking some tough measures to begin 
implementing the agreement.  He added that the banks (Israel 
Discount Bank and Hapoalim) will threaten to cut off the 
services fairly frequently, but that the GOI has given them 
the assurances and procedures they need to keep clearing 
checks.  On the whole, IDB has been more cooperative than 
Hapoalim, but Hapoalim always comes around in the end. 
Fischer also said that the Israeli banks have asked him about 
the U.S. attitude towards the situation.  After speaking to 
U.S. Treasury officials, he said that he was able to assure 
the banks that the U.S. is unlikely to prosecute banks who 
have make a good faith effort to thwart terror financing. 
However, the USG could "obviously" not guarantee that a bank 
would not be subject to laws that are on the books. 
 
********************************************* ******************** 
Visit Embassy Tel Aviv's Classified Website: 
http://www.state.sgov.gov/p/nea/telaviv 
 
You can also access this site through the State Department's 
Classified SIPRNET website. 
********************************************* ******************** 
JONES