Israel Central Banker Search Resumes as Frenkel Bows Out

Benjamin Netanyahu’s struggle to find a new Bank of Israel governor may force him to listen more carefully to the advice of the man who ran the central bank for the past eight years.

After his original pick Jacob Frenkel withdrew late yesterday, Netanyahu pledged to find another candidate within days to take over from Stanley Fischer. With time running short, the Israeli prime minister could be tempted to give the job on a permanent basis to Karnit Flug, the current interim governor, said economists from I.B.I.-Israel Brokerage and Investments Ltd. and Ayalon Group Ltd. Fischer recommended his deputy Flug to Netanyahu during his first attempt to fill the post, said a person familiar with the situation.

“It could be that she will benefit from the vacuum that has been created,” Yaniv Pagot, chief strategist at Ayalon, said in a telephone interview, referring to Flug. “They may want to put this saga behind them as soon as possible. It’s been chewed on so long it’s like gum. And they have other things to do.”

Israel’s shekel pared earlier losses and gained 0.1 percent to 3.5708 a dollar at 2:46 p.m. in Tel Aviv. The currency has advanced 4.5 percent this year, making it the best performer among an expanded list 31 major currencies. The yield on Israel’s 4.25 percent benchmark bonds due March 2023 rose two basis points, or 0.02 percentage point, to 3.71 percent.

Replacement Soon

Netanyahu and Finance Minister Yair Lapid said they planned to name another candidate in the “coming days,” according to a text message sent to reporters. Frenkel’s candidacy was derailed after the Haaretz newspaper reported he had left a Hong Kong duty-free shop in 2006 without paying for an item, an incident the former Bank of Israel governor called a misunderstanding.

Frenkel, 70, withdrew his candidacy a month after accepting Netanyahu’s offer, saying in a television interview that he suffered an “avalanche of abuse” in the interim.

“I regret that recent developments don’t permit Jacob the right to serve the nation once again as Bank of Israel governor, something in which I’m sure he would have contributed greatly to Israel, its citizens and economy,” Fischer said today in an e-mailed statement.

Gila Finkelstein, a member of the committee that was vetting Frenkel’s appointment, said on Army Radio today that Frenkel would have been “the right man, at the right time, in the right place.”

“There was a deliberate and malicious effort here to block his appointment,” she said.

International Renown

Frenkel’s withdrawal sets back Netanyahu’s efforts to appoint an economist with international credentials to head the central bank. The daily Ma’ariv named Flug, former finance ministry director Avi Ben-Bassat and Bank Hapoalim Ltd. chief economist Leonardo Leiderman as potential candidates. All three served as heads of research at the Bank of Israel.

Frenkel’s career trajectory has taken him from the halls of the University of Chicago to the research files of the International Monetary Fund to the boardrooms of JPMorgan Chase & Co. His decision to withdraw is a “big miss” for Israel, Lapid said in a statement.

“Netanyahu and Lapid both have called me to try to dissuade me, to stay a little longer and all the rest,” Frenkel, who served as governor from 1991 to 2000, said in a telephone interview. “From day one, I thought I should let somebody else do it. I allowed my arm to be twisted. But if it’s not fun, why do it at this stage of my life?”

‘Last Minute’

Terence Klingman, chief strategist at Psagot Investment House Ltd. in Tel Aviv, said the prime minister’s decision-making process was flawed.

“They knew for six months that Fischer was going and they dilly dallied with a decision and then appointed Frenkel right at the last minute,” Klingman said in a telephone interview. Given the problems with Netanyahu’s first choice, “it’s going to be hard for them” not to appoint Flug, he said.

In its first Flug-led meeting, the bank’s monetary policy panel kept Israel’s benchmark interest rate unchanged yesterday at 1.25 percent. The central bank said indicators suggest “continued growth of economic activity at the relatively moderate pace of the past two years, which eased concerns of an additional slowdown.”

Frenkel’s withdrawal may save the Bank of Israel from further problems down the line, said Rafi Gozlan, chief economist at I.B.I., in Tel Aviv.

“Otherwise the cloud over the candidacy could have made it difficult for Frenkel to function and could have turned him into a lame duck,” Gozlan said in a telephone interview.

Fischer, 69, a former No. 2 at the IMF, stepped down midway through his second five-year term, citing personal reasons. The former thesis adviser to Federal Reserve Chairman Ben S. Bernanke at Massachusetts Institute of Technology, Fischer has been credited with helping Israel to weather the global economic crisis better than most developed countries.

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