With interest rates in Israel already at their lowest point in history, it appears that bank of Israel head Stanley Fischer is getting ready to cut rates dramatically lower.

According to a report in Globes: “Capital market sources expect Bank of Israel Governor Stanley Fischer to announce next week that he is cutting interest rates by another 50 basis points. These sources feel that the deepening recession, deflation and the aggressive lowering of interest rates by other countries worldwide will give Fischer no choice but to make an additional interest rate cut in order to encourage exports.”

This would bring rates down to just 1.25%. That seems great for people looking for loans, except that the local banks aren’t lending, and in cases when you can get a loan the capital and collateral requirements are cumbersome.

Not to say ” I told you so” but the fact that Fischer is finally waking up to the economic reality on the ground is something we have been harping about for 4 months( Here is a link from November where we warned on what was going to happen). Why was the public deceived by the powers that be, as to the real state and outlook of the Israeli economy, and why is no one demanding accountability?

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As we have mentioned here more than once, the Israeli economy may not be in as great shape as our leaders have let on. Tonight’s surprise 50 basis point cut, bringing rates down to just 3%, indicates that even the Bank of Israel is worried about a potential economic slowdown or even a recession.

With analysts lowering their ‘09 growth forecasts, Fischer who has until last week remained unrealistically optimistic, appears to have thrown in the towel an admitted that things aren’t all that rosy, and is trying to add liquidity to the Israeli banking system to try and prevent the same type of credit crisis gripping the global banking system.

While I think the local economic slowdown will continue, this aggressive move by the Bank of Israel will help stem the damage to the economy that a prolonged recession could cause.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Stanley Fischer, Governor of the Bank of Israel, spoke yesterday on the stability of the Israeli banking system. Fischer, along with many other public figures has gone out of his way to keep telling the public that the local banking system is sound. While scaring the public about bank failures is irresponsible, don’t Israelis deserve to be told the truth about what is going on? How about a little honesty from our leaders.

If everything is so rosy, then why does the BOI have a plan to stream money to the local banks in the event of a credit freeze? Is this prudent planning, or cause for worry?

As reported in Globes, Fischer spoke about how disciplined the local Israeli banks have been. “In addition, Israel’s banks had no sub-prime exposure. “Israel’s banks said ‘No’ to this paper,” said Fischer.”

Really? That’s not how I remember it. Bank in March Bank Hapoalim wrote off hundreds of millions of dollars. According to Reuters, “Hapoalim, whose shares have slid some 30 percent so far in 2008, said it posted impairments of 1.18 billion shekels, or $334 million, for its U.S. asset-backed securities portfolio. It had previously said it would write off around $300 million in the fourth quarter due to a decline in the value of its U.S. structured investment vehicle (SIV) holdings.” Other local banks also wrote off smaller amounts.

In the aforementioned Globes article Fischer also said, “Also the banks applied responsible credit policies.” Really? Is loaning money to the wealthiest ten families so that they can spend billions of dollars on international real estate, at the height of the real estate bubble, called responsible lending?

Shouldn’t the central bank head come clean with the Israeli public?

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Aaron Katsman
www.IsraelNewsletter.com

The Israeli Shekel is once again surging against all global currencies on remarks by Bank of Israel Governor Stanley Fischer,  saying that he expected the Shekel to continue to strengthen. What is strange about the comments is the fact that the BOI has been trying to prop up the US Dollar, actually intervening in the forex market, and stated their goal of weakening the Shekel.

So why the Fischer comments? I have no idea. Why would he come out in public and make statements that contradict the very policy that he himself implemented?

It’s possible that Fischer is worried about potential inflation in Israel, a phenomenon that we are seeing worldwide, and is signalling to the market that he isn’t going to cut interest rates anytime soon. He is planning to do all that he can in order to halt inflation, even at the expense of trying to devalue the currency.

Disclosure: He holds no position in any other stock mentioned as of 4/15/08.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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