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Speaker 1: Joining Danny and Aina Is Connieflug, former Governor of the

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Speaker 1: Bank of Israel, vice president of Research at the Israel

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Speaker 1: Democracy Institute in Jerusalem. Professor, good morning, thank you for

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Speaker 1: your time. We've just played you that line from the

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Speaker 1: UN and Bannsador that this is Israel's nine to eleven moment.

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Speaker 1: You've worn many different caps in Israel. You are in Jerusalem, now,

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Speaker 1: how would you define this nine to eleven moment for

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Speaker 1: Israel from your perspective? Good morning.

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Speaker 2: Well, I think currently really there is a state of

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Speaker 2: shock and terrible sorrow about the horrors that we see

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Speaker 2: on television, the massacre that took place in our communities

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Speaker 2: near the border, and there is a great concern about

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Speaker 2: what's coming. There is a great uncertainty about the unfolding

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Speaker 2: of the war. I would say that the only silver

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Speaker 2: lining is seeing Israeli is really mobilized and coming together,

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Speaker 2: volunteering on every front, including to reserve duty. So this

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Speaker 2: is really the state of fair right now and great

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Speaker 2: uncertainty about to what's coming.

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Speaker 3: Yes, I mean we have have to in these moments

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Speaker 3: look to those overlying sometimes, professor, and look, I know

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Speaker 3: you also started your career at the IMF. We're in

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Speaker 3: this moment where the IMF is meeting today in Morocco.

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Speaker 3: What does Israel need, not just uniting the country itself,

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Speaker 3: but from the global community, what is necessary in terms

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Speaker 3: of response and aid.

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Speaker 2: Well, I would say first that right now for israelis

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Speaker 2: the state of the economy and the economic consequences are

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Speaker 2: not what is on the mind of israelis now. I

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Speaker 2: think what we do need is support. I think what

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Speaker 2: we've seen yesterday in the speech by President Biden was

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Speaker 2: really hard for warming in terms of the support for Israel.

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Speaker 2: This very very difficult time on all firms.

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Speaker 1: We're trying to understand what happens next. I don't think

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Speaker 1: anybody really has a full grasp of that. We've just

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Speaker 1: had some additional use this morning on missiles coming in

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Speaker 1: from Lebanon. There's talk of a full scale land invasion.

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Speaker 1: And I want you to turn and try and put

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Speaker 1: in perspective economically the impact. We don't know how long

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Speaker 1: this war will endure, but from Israel's perspective, how much

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Speaker 1: risk is there now to the economy, how much risk

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Speaker 1: is to the outlook?

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Speaker 2: Well, if we look back at a previous wars, you

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Speaker 2: know the economy will probably have a big blow, but

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Speaker 2: at least in the past it had recovered very i

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Speaker 2: would say, rapidly and strongly. But of course the extent

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Speaker 2: of the damage to the economy will depend on how

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Speaker 2: things unfold and how long this war will be and how.

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Speaker 4: Broad it will be.

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Speaker 2: So we will see definitely a very sharp decline in

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Speaker 2: some sectors, first of all tourism, private consumption, investment, and

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Speaker 2: some of these effects are prolonged. So you know, if

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Speaker 2: we look back at the Second Lebanon War, there was

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Speaker 2: a very sharp decline in the last quarter of two

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Speaker 2: thousand and six, but then as strong a recovery by

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Speaker 2: the next quarter. But it's very hard to say, you know,

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Speaker 2: whether what we're going to go through now will be

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Speaker 2: of the same order of magnitude.

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Speaker 4: The number of reservists.

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Speaker 2: That have been drafted is much much large, and we

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Speaker 2: don't know the scale of the war that is coming.

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Speaker 3: So to that, quite professor, we have seeing. Of course,

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Speaker 3: the shackle was somewhat stabilized from the action of the

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Speaker 3: Central Bank, but there were credit default swaps which spiked

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Speaker 3: last year. With Bloomberg, he spoke to man as you

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Speaker 3: warned about the credit rating with the judiciary upheaval. Is

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Speaker 3: the credit rating now even severely more under threat with

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Speaker 3: now Israel at war.

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Speaker 2: It's very hard to say, because on the one hand,

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Speaker 2: I think my guess is that the judiciary reform is

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Speaker 2: off the table now, so in that sense that risk

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Speaker 2: is over. But obviously the geopolitical risk seems to have intensified,

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Speaker 2: so it's very hard to say how what would be

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Speaker 2: the reaction of the credit rating agencies. I have to

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Speaker 2: say though, that our financial institutions have been have exhibited

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Speaker 2: resilience over the last two significant shocks. They're very well capitalized,

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Speaker 2: they're very tightly regulated, so I think in terms of

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Speaker 2: financial stability.

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Speaker 4: We are okay.

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Speaker 2: And also I think the way the Central Bank reacted

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Speaker 2: it has demonstrated that it has the ability to really

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Speaker 2: react swiftly to the shock and to ensure the functioning

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Speaker 2: of all markets.

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Speaker 4: So in that sense, I think.

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Speaker 2: We are okay in terms of the financial markets and

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Speaker 2: financial developments.

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Speaker 1: Professor, can we just pick up on that the Central

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Speaker 1: Bank obviously defended the currency, I think not. I think

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Speaker 1: in that statement they said that they had sold as

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Speaker 1: much as thirty billion dollars. Now we don't have the

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Speaker 1: final number. That's no small amount for an economy at

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Speaker 1: the size of Israel. I know there's nearly two hundred

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Speaker 1: billion of reserves. My question to you is, you said

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Speaker 1: that they acted well and held the defense of the currency.

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Speaker 1: Do you think they're going to have to do considerably

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Speaker 1: more intervention than that? Will the market test if there's

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Speaker 1: a full scale ground invasion, if there is a serious

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Speaker 1: escalation as Hesbela claims that they have fired on Israel.

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Speaker 1: If there's major escalation, do you think that they will

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Speaker 1: have to intervene again in size?

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Speaker 2: Well, they said that they will sell up to thirty

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Speaker 2: billion dollars. That's a huge amount for the market, and

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Speaker 2: I think that that was enough to come the market,

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Speaker 2: and I'm sure given the size of our reserves, I

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Speaker 2: think that there will be necessity for more.

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Speaker 4: They will do more.

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Speaker 2: They said also that they're willing to inject liquidity or

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Speaker 2: fifteen billion dollars, So I think it should be enough,

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Speaker 2: and if there is more needed, I think we've seen

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Speaker 2: that actually just the announcement was enough in order to

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Speaker 2: come the market for an exchange market.

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Speaker 1: With that in mind, you talk about the swap, You

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Speaker 1: talk about the swap fifteen billion dollars of swap mechanisms

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Speaker 1: have been created. Professor I suppose what goes through Danny

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Speaker 1: and I's mind is that's a reassurance. In times of

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Speaker 1: high crisis, swap lines are incredibly important. How much more

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Speaker 1: detail do you want or does the market need in

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Speaker 1: terms of the FEDS participation in these swap lines, or

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Speaker 1: what additional swap lines are available globally? Is that is

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Speaker 1: that a psychological defense that can be boasted.

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Speaker 4: I think that it's not necessary for the moment.

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Speaker 2: I think, as you mentioned that there are two hundred

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Speaker 2: billion dollars of reserves, it's a huge amount that can

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Speaker 2: really be sufficient. And I think the market again, the

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Speaker 2: reaction of the market shows just the announcement was enough

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Speaker 2: to count the.

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Speaker 3: Market, Professor Flug, Earlier in the year, we did have

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Speaker 3: those in the right wing government that did assail the

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Speaker 3: current Bank of Israel Governor amirya Aran, his term comes

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Speaker 3: to an end in December. How important is it in

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Speaker 3: this moment of a knowingness of war, of necessary stability,

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Speaker 3: that he stays on.

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Speaker 4: I very much hope he stays on.

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Speaker 2: I think that would be the best demonstration that the

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Speaker 2: government wants a strong and independent central banks. So I

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Speaker 2: think that could be a very important step to demonstrate that.

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Speaker 1: There's also been discussion at the political level that a

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Speaker 1: coalition needs to be built. How important is it for

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Speaker 1: the country and for continuity, stability confidence that a coalition

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Speaker 1: government is formed. Is it something that you would vouch for,

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Speaker 1: call for support.

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Speaker 2: I think generally unity at this very difficult time is

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Speaker 2: called for, but I won't get any further into that.

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Speaker 3: Fair enough, you did mention some of the concerns when

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Speaker 3: it comes to the economic impact again, just when we're

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Speaker 3: trying to understand the contours and the natures of it.

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Speaker 3: There were concerns on FDI already previously to this again,

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Speaker 3: concerns about what's happening with some of the government, some

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Speaker 3: of the judiciary reforms. How crucial is that FDI conversation

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Speaker 3: right now?

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Speaker 4: Well, I think it's hard to think about it. Right now.

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Speaker 4: We're in the.

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Speaker 2: Middle of a crisis, and I think that we will

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Speaker 2: have to see how we come out of it.

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Speaker 4: Again.

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Speaker 2: In the past, the extent of the damage to the

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Speaker 2: economy of a war that has not been long has not.

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Speaker 4: Been very severe. But it's very hard to say that.

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Speaker 2: The past can teach us about what will happen now,

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Speaker 2: even the uncertainty about the severity, the lengths and the

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Speaker 2: contrasts of this current war.

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Speaker 1: As you look at the landscape we are in day five,

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Speaker 1: there are escalations around further attacks. From an economic and

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Speaker 1: from a monetary policy point of view, what is the

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Speaker 1: biggest risk now?

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Speaker 2: I think if looking at the financial stability is read

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Speaker 2: because of the strength of our institutions and our very

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Speaker 2: active central bank, I think we're okay.

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Speaker 4: I think there.

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Speaker 2: May be a longer term damage to the economy. It

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Speaker 2: will depend on the extent and the size and what

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Speaker 2: happens in terms of the war, but also on the

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Speaker 2: action of the government later on. I think at the

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Speaker 2: moment it has to allocate all the necessary resources to

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Speaker 2: finance the war and to finance the reconstruction and compensating people.

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Speaker 2: And as soon as this is over, I think the

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Speaker 2: question will be where we're going from there. But we're

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Speaker 2: not yet at this stage asking these questions.

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Speaker 3: Professor Flug. We know that this is a moment of

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Speaker 3: hardship and heartbreak, and we really appreciate your time with

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Speaker 3: us today. That's Cornet Flug, former Governor of the Bank

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Speaker 3: of Israel. Thank you. So much,