Inside the Bank of Israel’s pandemic response with Governor Amir Yaron

Professor Amir Yaron took the helm of the Bank of Israel at the end of 2018, in a bygone world. While the coronavirus continues to wreak havoc on the world economy, Yaron has won high marks for his stewardship of Israel’s finances

Professor Amir Yaron was sworn in as governor of the Bank of Israel in December 2018 — a different world. While the first year and a half of his term were relatively calm, he found himself captain of a storm-tossed ship in raging seas when the coronavirus hit.

“Coronavirus caught the Bank of Israel just as we were starting to implement a long-term strategic plan that had been in development for a year,” he says.

But when the virus hit, that focus was replaced with a battle for survival. Yaron says he tries to face the situation with a calm resolve.

“I get up each morning with a deep sense of mission,” he says. “There have been Bank of Israel governors who served in times of peace, and others who had to deal with crises. I’m working through a once-in-a-century crisis. I am aware of the heavy responsibility that I carry, and of how our policies influence the economy and the finances of every citizen in the State of Israel.”

Yaron, 56, was born in Tel Aviv and studied economics at Tel Aviv University, going on to receive his doctorate at the University of Chicago. His lengthy career in academia began with a stint at Carnegie Mellon in 1994, before being appointed in 1997 as the Robert Morris Professor of Finance at the University of Pennsylvania’s prestigious Wharton School. During his tenure at Wharton, he published many economic research studies, directed the capital markets and economy group at the National Bureau of Economic Research, and was a guest scholar at the Federal Reserve in Philadelphia.

It was from Wharton that Prime Minister Binyamin Netanyahu tapped Yaron to succeed Karnit Flug as governor of the Bank of Israel in 2018. Some criticized that appointment on the grounds that Yaron’s two decades in America had distanced him from day-to-day realities in Israel. Many economists praised him, however, and he says that “after nearly two years on the job, of which eight months have been characterized by the worst financial crisis in recent decades, this question is being asked less.”

Professor Yaron sat for an in-depth discussion with Mishpacha about the challenges the Israeli economy has faced during the pandemic. Despite the intense demands of his job, the governor remained calm and easygoing during the conversation.

The State of Israel was already facing a budget deficit before the pandemic, and now the figures look far worse. Some economists say we are digging a pit that coming generations will struggle to climb out of, others insist the situation is stable because of the strength of the Israeli economy. Whom should we believe?

It’s a complicated question. It’s true that we entered this situation with a solid, growing economy and a good starting point — aside from the structural deficit and the debt-to-productivity issue [the ratio of the nation’s total debt to its gross domestic product]. In the longer term, we would want to see some progress on that. At my swearing-in ceremony, I said that Israel had a strategic asset in that its debt ratio had declined to 60 percent.

We had until then displayed fiscal responsibility, and it serves us well to this day that the markets see us as a responsible economy. Now our budget deficit is becoming much more concerning, but if we look at the growth in the deficit between 2019 and 2020, relative to other nations we currently rank in the middle of the global charts.

If we had not had more lockdowns, we estimated the debt ratio would grow to 78 percent. That’s a significant downturn from our starting point. But here again, if we compare Israel to other markets, we find ourselves in the middle of the charts on the issue of debt growth. We are in the midst of a global crisis that many countries are grappling with. The world is all in one boat and the water has inundated everyone.

So the markets look at the absolute aspects that the debt ratio is rising and the budget deficit is high, but they also take into account the relative aspects, showing that we are positioned in the center.

Having said that, we must manage our risks very carefully. The current forecasts predict a debt ratio of 87 percent in 2021. This is a situation that requires us to act wisely, and of course, to implement a budget in line with the current reality.

Does that mean that the economy and the banking system might deteriorate further?

Our goal is to be able to manage the economy for the long term, even with corona. At first, our understanding was that we needed to form a bridge from the beginning of the crisis until a few months after it, and then to rise up again. Today, our understanding has totally changed. Now it is clear to us that this is an ongoing string of events that we must live with. We also know that the vaccine will likely not be here before next summer.

Lockdowns impose direct costs on the economy, but also cause damage that accumulates over time. Therefore, it is crucial that when we emerge from this lockdown, we must do so in an organized fashion, with an effective system in place to stop chains of infection, at least until we have a vaccine. When that vaccine arrives — based on our assessments, in the second half of 2021 — the economy will begin to grow once again.

So you believe that whatever cumulative damage the Israeli economy has sustained, the fundamentals are still in place.

The State of Israel still has a dynamic and very creative economy. We have high-tech and cyber sectors that compete with very advanced economies. My assessment is that specifically because we don’t have classic heavy industries, we will be able to emerge from this crisis in a good situation. We will have less damage than other developed economies. That’s the light at the end of the tunnel.

The Bank of Israel’s job is to manage monetary policy for the State of Israel and advise the government on fiscal policy. The governor decides the exchange rates based on foreign currency reserves, and sets the interest policy that affects loans, mortgages, and yields on savings accounts. In times such as these, however, the governor’s role as fiscal advisor to the government takes center stage.

You’ve been at all the significant meetings that Prime Minister Netanyahu held on the subject of coronavirus, to present the economic ramifications of government decisions. Can you give us a picture of how these went?

We have been in this for more than seven months. We need perspective. Before the crisis, we had three election campaigns, and constant alarms that we were facing a structural budget deficit of more than 4 percent. We needed a government that would deal with it. Those were our pre-crisis concerns. We didn’t all like to hear about those either, but that was the situation we were in. When this event began, we were the first to realize that we had to alter our thinking. We realized that we are in a totally new world.

How did that realization change your priorities?

With all due respect to the structural deficit — which we still need to resolve, of course — right now, we must help the economy. First of all, without getting into this or that detail of the budget, I can say that I was at all the meetings, including those with the prime minister. We presented the massive costs of the lockdown. There were lots of meetings, and the decision makers had to constantly make the calculations to try to balance health concerns from lockdowns with the economy. Later, we also presented the ramifications of extending the lockdown, and of closing shopping centers. This was all part of my financial advisory position. In the end, the political echelons make the decisions.

Were you also involved in the government’s aid package to help the citizens?

There were a few aid packages, comprising tens of billions of shekels. The Bank of Israel was a partner to these packages. The first aid plan was worth NIS 80 billion. Then came the second one of NIS 20 billion, and then a financial security net with more assistance for the economy.

The economic safety net was crafted with significant involvement from the Bank of Israel. It was finalized at a meeting held at one in the morning. That meeting was attended by Finance Ministry personnel, and the director of the National Economic Council Professor Avi Simchon, and myself. Of course, the fiscal aspect is in the hands of the Finance Ministry, and they lead that discussion. But we helped with pragmatic advice. We were also very involved in the NIS 20 billion plan, in various aspects of the implementation.

(Over the course of the interview, it is hard to get the governor to speak critically at all. But when the subject of the lockdowns and the exit strategy comes up, he struggles to contain his disappointment at the implementation.)

Do you believe the second lockdown was the right approach?

I said at cabinet meetings that we have to manage the risk in a balanced way, because the debt ratio was nearing 80 percent. Today we are much closer to seeing productivity being significantly affected, and expenses are much higher. That means that the deficit will also be higher, and, as a result, the ratio of debt-productivity might reach 87% in 2021. Based on our estimates, if we continue having waves of lockdowns, we will get to alarmingly high debt ratios.

Is there a concern that the economy will go into freefall, leading to a default of the entire banking system?

The banking system entered this event in a very good situation, with a high-quality, decentralized portfolio, and secure capital cushions. Of course, we are in a very significant situation, and the banks will absorb losses throughout, but the system has the ability to absorb this and it is stable.

At the same time, repeated lockdowns will increase the struggles for businesses.

It is very important to maintain the balance between health and the economy. It is clear to us that the more lockdowns there are, and the more we cannot restore the economy to a decent level of function, naturally, the deeper the problems businesses will have.

At a certain point, after the first lockdown, we saw the economy bouncing back a bit. We saw it in our models and on credit card purchases. The question is regarding the real damages that are ultimately manifested in the banking system. The extent of the damage depends on when we will be able to reduce the virus caseload and if there will be an effective and efficient system of preventing chains of infection.

Has the exit from the lockdown been handled effectively?

The drafting of the exit strategy from the first lockdown began in cooperation with the chief economist at the Finance Ministry and other ministry personnel. This document included capsules for the school system, but a very important clause in the document was not implemented — enforcement of the regulations.

We were very involved in the general policy and also in the more detailed parts of each step. The exit from the lockdown was supposed to proceed alongside enforcement that would help cut down infection chains. That did not happen. The employment model that was part of the preliminary budget that we presented, which was a bit similar to employment preservation model presented a few weeks ago, was not implemented at all for various and sundry reasons. Then the infections began to rise, and the safety net was drafted.

During this discussion, we’ve neglected to mention that the State of Israel has been running without a budget through this entire crisis. How critically has this lack been felt?

There is no doubt that it’s important for there to be a budget. Passing a budget gives the government more tools and flexibility to deal with the crisis. The budget must also address the need for economic growth drivers and an exit from the crisis.

Coronavirus is generating a lot of uncertainty. The budget will give needed clarity to ministries and private entities that work with the government. Approval of the budget is important even for our standing in global markets. It affects the faith of the markets in the Israeli economy. If corona later requires that the budget be supplemented, when those additions build upon the foundation of an organized budget, then the markets give a better rating to the fiscal strategy.

What effect will the normalization of ties with the UAE and Bahrain have on the local economy in the short term?

I think there is tremendous opportunity here. There is significant synergy between our economy and these economies, and there are certainly opportunities that I think will make it possible for both us and them to develop and progress in a better fashion.

How does the current financial crisis compare to the 2008 crisis?

The crisis then did not really strike Israel. We did not have derivatives of American mortgages. It was a crisis that began in America, and did not critically affect us. Now it’s different. This is a health crisis that has turned into a financial crisis. We are at a different point.

In 2008, in a sense, we waited until the end of the crisis to see where and if we had to help. But it is illogical to draw a parallel between that crisis and this one. I said this at internal meetings as soon as the crisis erupted.

This understanding is very important. It ensured that instead of looking at corona as an event where we assess the damage afterwards, we looked at the virus as an ongoing event. It’s not something that we can ignore while it’s happening. We understood that it’s different and that we have to alter our thinking. We had never experienced such a thing. Here, in contrast to other crises, we needed to help at the same time as it was unfolding, not clean up afterward.

When did you know we were looking at a once-in-a-lifetime event?

The day that I recall as very significant was March 14, 2020, when people swarmed to the ATM machines to withdraw cash. The Bank of Israel, and specifically the currency department, worked exceptionally well to prevent needless panic. They ensured that the ATM machines would be full. In order to prevent this onslaught from continuing, I went on the media, together with the Bank’s supervisor, and we reassured the public. There was no reason to think about worst-case scenarios, then or today.

Since the beginning of the crisis, we’ve taken a series of steps that had never been taken by the Bank of Israel. I divide these measures into three categories: humanitarian policy, ensuring the health of the banking system, and advising the government. In all these areas we are working very effectively, with tools that we’ve never used before.

Your response to the run on ATM machines must have involved some type of planning beforehand. Had you been watching the progress of the virus in other countries?

We prepared for this in February already. We opened a situation room. At the beginning of March, just as the crisis began, we convened all the bank directors to plan for what was coming. At the outset, there were sharp losses in global stock markets, and that led to dysfunction in certain markets.

The first thing we did to restore local markets’ functioning was create liquidity, using our reserves. We used our weight in a very concerted and immediate fashion in order to allow the markets to resume functioning. We also got involved in the government bond market and the foreign currency market. Our actions on these level — valued at $15 billion — led to a restoration of market functions very rapidly.

You also had some important work to do on the credit system. Can you describe that?

We needed to make sure that the credit system would flow as smoothly as possible. That is where the humanitarian and banking policies came together. We began the crisis in a world of very low interest rates. It’s like a farmer who already has the sprinklers on, but wants the water to reach the edges of the farm. We wanted to get to the edges of the farm, to the perimeter.

We got involved in the government bond market and said we would buy up to NIS 50 billion worth of bonds. From then until now, the market has been functioning not only normally, but even with low interest rates, to make it possible for businesses, households, and the government to function better. This is very important. We lowered the interest rate from 0.25% to 0.1%.

Another step we took was to give loans, from the Bank of Israel to other banks, as long as they proved that they would pass those loans on to small businesses. To date, the banks have given more than NIS 12 billion of loans to small businesses using this tool.

As soon as the crisis broke out, I convened a meeting in my office with all the directors of the country’s banks. I told them that we can choose one of two options. The first is to tighten the belt very strongly, strangling all credit, and then deal with the resulting problems. The other option is to give credit, in a responsible fashion. Be flexible and give credit, hopefully minimizing the damage while helping households and businesses get through this period. The banks chose the second option.

We also reduced the requirement for liquidity ratios, which is the ratio for the amount of cash the banks need to keep on hand, and this way, the credit frameworks were expanded very quickly, the minute we reduced the ratio. As soon as the crisis began, businesses with lines of credit tapped them for NIS 21 billion. Mortgage activity also rose that month.

Another measure was adapting regulatory and accounting tools that made it possible to postpone payments without the borrower becoming tainted by the delinquent payments. The minute the banks make it possible to delay loan payments without classifying the borrower as problematic, they do not have to set aside capital to offset it. It is much easier for them to postpone payments. These two steps led to immediate relief already at the early and critical stage of the crisis.

You said the Bank of Israel has taken steps in this crisis it had never taken before. Can you point to some specific examples?

To date, the Bank of Israel used government bonds as securities, as they are the safest. But as the crisis progressed, we also turned to corporate bonds, because there was a liquidity issue with government bonds. We prevented a liquidity crisis, which would have affected the function of financial markets. So much of what we did was different from how it had been done in the past.

In addition to the steps I’ve detailed, we worked on expanding digitization at the banks, and we also issued a directive for the banks to issue debit cards, so those who get stipends from the National Insurance Institute did not have to appear in person to pick up the money, thereby risking contagion. Then there is the aspect of government costs and fiscal policies. That’s an aspect we discuss constantly, but the quiet on the humanitarian and financial front is, in a sense, an achievement for the Bank of Israel. We displayed independence and determination to make the right choices.

Coronavirus has had a devastating effect on the Israeli economy, but has wrought financial ruin on the chareidi sector. Chareidi cities have been locked down repeatedly, businesses were severely affected, and unemployment is rising faster than in the general sector. Can you offer your assessment of this crisis?

Corona did not affect everyone equally. The Bank of Israel analyzes these things, and has found that the crisis indeed has seriously harmed the employment of workers without degrees. That means it has financially affected chareidim as well. There must be a coordinated effort to ensure that during the crisis, and after it, every effort is made to mitigate the damage that we see in the chareidi sector. Mitigating that damage benefits the chareidim themselves, and of course the Israeli economy at large.

So you would agree that the chareidi community is an asset?

The chareidim really are a significant factor in the economy, and are expected to become much more significant in the future.

We have senior researchers who study the various sectors through the economic lenses, include the chareidi sector. There are also research institutes that are very familiar with the chareidi community, and we cooperate closely with them. At the same time, it is of course possible to tighten our connection with the chareidi public also through entities that work directly with us. It’s a very good thing.

The Bank of Israel has about 30 chareidi employees, and I want to reiterate my call that chareidi workers are invited to join the bank and our little community. I can say that our chareidi workers make a very big contribution to the bank.

To what extent are the heads of the chareidi parties in contact with the Bank of Israel, and involved in the financial decisions that are made? Do they meet with you frequently?

I certainly know and admire the chareidi representatives and am in contact with them from time to time. They head various Knesset committees, and we at the Bank of Israel are in regular contact and help them by providing various analyses on economic matters. There was also the subject of the credit information database that led to the intervention of chareidi representatives. That is why I think that there is a connection and cooperation, and we will of course continue that. We are always open to dialogue in order to understand the needs of the chareidi community. Communication with the sector helps us as well.

A year after you became governor, you spoke at an economic conference on Israel’s chareidi sector. You made headlines when you referred to possible tax hikes lasting until the year 2065 if the chareidim don’t participate in the workforce. Did you think that what you said at the conference would generate such harsh reactions?

Anyone who reads everything I said, and not just one headline or another, realizes that the speech was an embracing one. The intention was certainly good. There is no doubt that the chareidi sector is a very significant part of the state and its future, and I say that with tremendous admiration. It’s important to remember that we are all in the same boat. The chareidi community understands this as well. Integrating chareidim will have a positive influence on the entire economy.

It’s important to note that the model that we presented at that event spoke about the change of tax policies in 2065, and regretfully, some headline, for whatever reason, presented that as if it were an immediate change. People took it the wrong way. In reality, the model I presented tells us the importance of taking the right steps that we can take now, so that we can continue to thrive for decades to come.

(Originally featured in Mishpacha, Issue 834)