Fischer: I can imagine $100b currency reserves

Bank of Israel Governor Prof. Stanley Fischer has not ruled out Israel's foreign currency reserves reaching $100 billion. In an exclusive interview with "Globes," after being named person of the year at the 2010 "Globes" Israel Business Conference, he was asked if he saw Israel's foreign currency reserves reaching $100 billion."
He said, "I can imagine a situation in which that would happen but at the moment I do not see such a situation."

Israel's foreign currency reserves totaled $68.3 billion at the end of November, up from $40.8 billion in February 2009, as the Bank of Israel has bought billions of dollars to help exporters by weakening the shekel.

Fischer insisted that Israel's foreign currency reserves are not too high. He said, "I, the government, the markets, the ratings agencies all feel more comfortable with a high level of foreign currency. People say there is a problem with the level of foreign currency reserves. I don't see a problem. On the question of why Israel needs to hold such high reserves I say that it is because we are a country in a special situation, and I want to remind you that during the crisis virtually the entire world increased reserves.

He added, "Look at what happened during the crisis in countries like Russia, Korea and Brazil. Russia entered with very large reserves of $560 billion, which everybody said was too high. During the crisis, Russia was forced to intervene to defend its currency from falling, and in the end succeeded in stabilizing it. In Brazil, when the crisis began all credit lines were cut and the central bank was forced to give banks credit in foreign currency from its reserves."

Fischer felt that the intervention has helped weaken the shekel. "When the dollar reached 3.2 against the shekel, I waited for market forces to deal with the problem, but they disappeared and nothing happened, so I decided to intervene. It's possible to claim there was no need for it but that is incorrect. It's impossible to wait until the market understands it has overreacted while meanwhile damage is done to exporters, and Israel's exports are 45% of GDP."

He continued, "Colleagues and economists tell me they are surprised. 'You Stanley of all people to intervene in the foreign current market.' But I have written many times that a small country simply has no other option. If a train is coming straight at you and is likely to hit you, you wouldn't act? If a phenomenon is taking place that is increasing damage to the economy and you can deal with it, wouldn't you deal with it?"

When asked how long the interventions will continue for, he said, "The current period is very complicated. Economies at the heart of the global economy are not in a good state and we do not know when we will pull out of the crisis. I hope that in another year, we will not be in this situation but if I'd been asked three years ago how long it would take I would not have said three years."

Fischer outlined what he is doing to restrain the sharp rise in home prices. "We are working in the housing market because it endangers the financial system. We are not dealing with the housing market to solve the problems of the housing market but prevent a future bubble that will burst."

He added, "The bursting of a real estate bubble would cause damage to the entire financial system, there if we see prices continuing to rise we will take additional steps. It doesn't look like we will stop the rise in prices in the near future, but we hope to succeed in slowing down the pace of the rise.'

However, Fischer insisted that there is currently no real estate bubble. "If we see prices rising another 20% over the next 18 months, then I would have to agree that there is a bubble. But as I see it at the moment, after ten years of falls in the prices of homes, two years of rises have followed. We are above the prices of the mid-90s but not by much. Even by international comparisons we are not in a bubble. There are only two countries in which the price of homes has almost not risen over the past decade: Germany and Israel. Since the end of 2008 we have seen prices rise but in Australia prices have risen by a multiple of 2.5 over the past decade."