We entered the foreign currency program in order to build up our reserves. At the time when we started in March we didn't know we are going to face a period as unstable as this one but we worried that even so about our reserves and the likely challenges the Israeli economy could face. We are very, very happy we got into that program then and we are considering continuing the program beyond the original plan but not necessarily at the same fixed rate per day. Circumstances have clearly changed and if we were we to redo the analysis which depends on how much we need and the variability in the market, we would very likely have come out with much larger amounts but we haven't done that analysis yet.

The state of the banking system. The banking system as a whole is in good shape. We only had one bank which was significantly affected by the subprime mortgage-backed securities and CDS in the US, which it got rid off very quickly. In addition we are very fortunate that our mortgage market is quite conservative. Israeli banks provide mortgage finance of between 65 to 70% and not 100% like in the US, which makes an enormous difference.

We also didn't have a housing sector boom in part because mortgages are not so favorable to borrowers. In spite of the high-end market which did get off but it is a relatively small segment which can be expected to be affected. 

We are going to be affected by what is happening in the world. The appraisals of the past week or two have worsened significantly. Last week the IMF again reduced its growth forecast for the global economy in 2009 to 2.2%, 0.8 percentage points less than last month's estimate.  It also reduced the US growth rate by 0.10% within a period of a month. That is a phenomenal change in the outlook. But here we are late in the process of reducing growth rates. Nonetheless we are part of the global system and we will be affected in two ways. One is the growth of the export markets which is going to be much lower than we predicted and the other is the financial situation - all those things will affect us from abroad.

The financial situation may be stabilizing because of the extraordinary actions by the US Federal Reserve and unprecedented actions by central banks worldwide. We have to watch and see but in any case the reduction in stock prices will reduce the wealth of Israeli households and reduce their willingness to consume, the increases in the spreads between government bonds and corporate bonds will affect Israeli borrowers and almost any other trend happening in the world will affect us.

Well in this race no one is going to win in the sense that someone is going to come out with more rapid growth as a result of this recession. The question really is whether we Israel can come out with having attained growth in 2008 and 2009 and having maintained financial stability. We will have a significant slowdown in growth. We will grow at 4.5% in 2008 and we will not be close to that in 2009. We have to try and make everything to make sure that the impact on growth is measured and smaller on average than in other countries and I think that we can do.

Obviously it would be better if we had a passed budget for 2009. But we don't. The question is what happens in the interim. I am pretty confident that the budget will remain under control. We work very closely with the Treasury and I know the record. There is the fact that in the absence of a budget next year, the 2008 budget will be implemented in terms of one-twelve of the budget per month until a new budget is passed. There is not going to be a budgetary explosion by any means and I have sufficient confidence that the Israeli public and the political system have learned from the experience of the past five years that having a responsible fiscal policy actually helps the economy in growing.

There is the question of what we support in the budget. We clearly support the operation of automatic stabilizers that is if tax receipts fall not to try to compensate for them by raising tax rates – that would be a mistake. If expenditures rise, because for example a rise in unemployment benefits not to try and cut expenditures somewhere else. 

We are in a different situation than other countries where it has become necessary to implement rescue packages. But our government will be watching the situation and look for ways to make sure that credit is moving to the private sector, in particular to export companies.

We might have room but very limited room for other measures, for example, a scheme to help to provide credit to small and medium-sized enterprises and perhaps to exporters. So there will probably be government intervention in dealing with the credit crisis and the decline in credit supply in the economy. But we will not be able to do what the United States and other industrialized economies are doing in terms of massive fiscal expansion and fortunately we don't have to do it. It is not necessary in Israel.

We have cut interest rates twice over the past month and as the global interest rate environment is shifting rapidly we will follow that and act accordingly. In the new law of the Bank of Israel, which is not yet law, we have three main tasks. One is to keep inflation within the government's target range of 1% and 3%. The second is to support growth as long as inflation is under control and the third is to maintain and support financial stability. Given that no one expects the inflation rate to be high a year from now because the price of energy and commodities is declining and because the slowdown in demand will reduce inflation we are assuming that inflation will fall back into our target range in less than a year. What this means is that we can focus on the two other tasks.

There is this related argument that the excessive boom and cheap money availability between 2003 and 2006, 2007 caused by the low interest rate of the US Fed following the recession of 2001 and 2002 and we got to watch out for that next time. I still believe there will be ample opportunities to raise interest rates. But I wouldn't at this stage of the game think that we can start worrying about what is going to happen in two years time. The future is so uncertain in terms of what future interest rates will be that we really need to look so far ahead as we can. I don't have much confidence in the ability to forecast to what is going to happen in a year's time economically.

I am pretty sure at least in the case of the US and the UK that there is absolutely no desire to keep those banks under state or public control. Israel was forced in 1993 to buy all the banks and successfully insulated their management from political interference. It was done in part by having the directors who represent the government not chosen by the government but by independent sources and the government didn't own shares and presumably it should be possible to work out something similar. Still there is for example a desire in the Bank of England to make sure that the banks the British government invested in increase the amount of credit they provide so there will be a degree of influence but I doubt it will be on the level of the board of directors. It might more be based on cash injection agreements and I believe similar measures will apply in the US rather than public ownership.

The securitization of mortgages may suffer for a long time but if they can get the ratings right and solve this problem and restructure these mortgages there is no reason why this market should not continue. In this crisis there are many areas where we have to be careful not to through out the baby in the bath water. Securitization is one of them. Another is public/private ownership and excess of regulation. If we prevent banks from taking risks we could be sorry about that. So in every area you need to measure the risk and it is going to take some political skill to avoid overregulation.

The general complaint from the bankers is that they have been overregulated. I think at this time the fact that the regulation of the Israeli banks is pretty strict has actually proven to be a good thing and is appreciated rather than regarded as being a problem. We have the recent international report of the CRMPG (Counterparty Risk Management Policy Group), which came out on August 6 providing recommendations of external and internal changes to risk management. We will draw those conclusions and we will apply them. For instance there is a general desire for a liquidity ratio. We will be learning things but I don't think there is a particular need to strengthen our supervision at this moment. We will keep following very closely what is happening in the banking system.

We are working very closely with the Treasury on the entire financial system and our cooperation is very good but we respect the relevant areas of competence. There have previously been different views of the regulatory system. We support prudential supervision according to the Dutch model. Prudential supervision of all financial institutions of risk management, which means supervision of risk management is in the central bank and conducted business which is consumer relations and investor relations including the stock market is somewhere outside the central bank. This is our proposal and there are other proposals such as adopting the British model of the Financial Services Authority (FSA) putting everyone together in a separate organization. However we decided together with the Treasury that we are not getting into this in a serious way until the crisis is under control. In other words we don't think that we should at this time start to make structural reforms which will take a while to carry out and a while yet further to implement. Our resources need to be focused on what needs to be done which is to contain the crisis.

The dollar has been floating around versus the euro at 1.25 or 1.26 for a while now. What has happened is not necessary a huge increase in confidence in the US economy but a decline in confidence in other economies with moves into US government securities which people have confidence in. As a result interest rates have gone very low. The US current account of balance of payments is going to improve in particular as a result in the decline of the price of oil. The US balance of payments was around 6% of GDP a year ago it is going to be significantly lower around 4% of GDP. From that point of view the dollar is within hailing distance of some form of sustainable level. But given the capital flows overall in the financial system it is very hard to say where it's going. However if Europe gets its act together and the US comes out with a really persuasive program the dollar will strengthen.

The issues around the corporate bond market are complicated because the bonds are anything but uniform but there are clearly some good borrowers and some bad borrowers and some are going to have trouble. Fortunately there is no major need to roll over the majority of debts until 2010 and a lot will happen until then so we don't need to anticipate to take actions from these issues. We also need to realize that not every borrower who borrowed in the years 2005, 2006 or 2007 should be refinanced. So we need to be careful not to go in and say keep the baseline amount exactly where it was in exact the same proportions it was because the world has changed. The real estate is not what is used to be and all sorts of other sectors. We just better not fall into the trap of believing that if somebody is in trouble we have to rush and rescue him. The best thing we can do is help to organize the best exit.

One of the great things I have learned about life is that you don't have to make decisions before you have to make them.