Clash Over Israel’s Foreign-Currency Reserves

A financial expert scathingly criticized the Bank of Israel’s management of its foreign-currency reserves Thursday, alleging massive lost investment opportunities, Globes reported.

Hedge-fund consultant Avi Tiomkin, the chief investment officer of the Tigris Financial Group, said that the bank’s failure to invest in U.S. government bonds has resulted in a loss of some $15 billion.

Tiomkin made his remarks at a conference of the Aaron Institute for Economic Policy at the Herzliya Interdisciplinary Center.

“In every investment company, every hedge fund, and the entire industry to which many of us belong, it appears to me that those responsible for actual management would not retain their jobs, and I’m sorry to be saying this in such a harsh manner in the presence of the governor of the Bank of Israel [Karnit Flug],” he told the gathering.

“I’m not talking about sophisticated management. Since the reserves began to grow, the difference between keeping all of the reserves in U.S. bonds, the safest and most liquid investment, would have generated over $15 billion in additional income. In my estimation, the Bank’s obsession with keeping the reserves because of concern about an interest rate hike, due to its fear of inflation and an increase in budget deficits, has cost Israel at least $15 billion, which is equal to the defense budget for an entire year.”

BOI marketing department head Andrew Abir was unflustered in response:

“You are not the first person who wants to fire me. You have to understand what we have done in managing the reserves. The expected return on the reserves in the medium term is higher than the short-term return on short-term loans. We did this responsibly, and we will continue doing so.”

In an official reply to Tiomkin’s criticism, BOI waved its resume:

“The Bank of Israel has won international acclaim for its management of the foreign currency reserves, and this year won Central Banking Magazine’s international prize for it. The reserves are managed in accordance with the risk concept formulated by the Monetary Committee, which is how Israel’s reserves portfolio should be managed — high liquidity in an emergency, for example. It is known that the Bank of Israel has also begun investing the reserves in shares and corporate bonds in recent years, and the risk profile has been increased on the basis of a professional and responsible analysis of the features of the portfolio and the developments in the global economy — a process that Central Banking said was pioneering.”

Meanwhile, the bank continued on Wednesday its policy of intervention to keep the shekel down by buying several hundred million dollars in foreign currency. The dollar-shekel exchange rate has been sliding toward the NIS 3.60/$ mark, which has importers holding their breath.

Lior Faust, head of the foreign currency desk at Leumi Capital Markets, said, “It seems that NIS 3.60/$ is interesting for the markets because that is the level which the Bank of Israel wants to maintain. Crossing below that level would bring about a swift slide downwards.”

The rate was NIS 3.6085/$ as of Thursday evening in Israel.