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Karnit Flug named as new Bank of Israel Governor

Ariel Jerozolimski | Getty Images

After a contentious process, Israeli Prime Minister Benjamin Netanyahu announced his nomination of Karnit Flug as the next governor of the Bank of Israel on Sunday.

If approved by Israel's cabinet, she will replace Stanley Fischer who left the post in June. Flug has been the acting governor since Fischer departed.

In the last few days, there have been reports former U.S. Treasury Secretary Larry Summers, once a candidate for the U.S. Federal Reserve's top job, turned down Netanyahu's offer to lead the Bank of Israel. Netanyahu has a record of finding non-Israelis to lead the Bank of Israel — Stanley Fischer only became an Israeli citizen after accepting the job in 2005.

"This is a good decision," said Rafi Gozan, chief economist at IBI, one of Israel's biggest brokerage firms. "It took too long. Stanley Fischer gave his blessing, Netanyahu should have done this earlier."

Despite the fact that Fischer had pushed for Flug to take the position after him, Netanyahu and Israeli Finance Minister Yair Lapid first tried to replace Fischer with former Bank of Israel Governor Jacob Frenkel over the summer, but controversy erupted after it was revealed he tried to cover up an arrest at the Hong Kong airport several years ago for shoplifting from the duty free shop.

Frenkel who has also held positions at AIG, Merrill Lynch and JPMorgan Chase International insists the incident was a misunderstanding. Netanyahu's second choice was Leo Liederman, an economist at Israel's largest bank, Bank Hapoalim. He later withdrew for personal reasons, then reports came in that Summers was offered but wasn't interested in taking the position.

Netanyahu and Lapid issued a joint statement Sunday saying, "We were impressed with the performance of how Dr. Flug led the Bank of Israel in recent months, and we are confident she will continue to help us lead the Israeli economy to reach new heights despite global economic turmoil."

In a short statement, Flug thanked the pair and said "the Israeli economy faces significant challenges" and that she looks forward to working with the staff at the central bank and the government to meet those challenges.

Even just a few weeks ago Flug was not on Netanyahu's short list. When asked about the possibility that she could become the next governor he was quoted in the Hebrew media saying "anyone but her."

Several sources say the Prime Minister stood against Flug because when she was a researcher at the Bank of Israel she wrote a report giving credit to a global economic wave for helping the Israeli economy rather than Netanyahu's economic policies when he served as Prime Minister in the 1990s.

Zack Miller watches the Israeli market closely as a partner at OurCrowd, a venture capital firm.

"Markets don't like uncertainty and having Flug continue to carry the torch should be met well," he said. "I think the market should respond positively as she fights the good fight that Fischer began."

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If approved Flug will be the first woman to hold the position. This comes a week after President Barack Obama nominated the first woman in the United States to be chief of the Federal Reserve, Janet Yellen.

Flug is a long-time employee of the Bank of Israel, she received her doctorate in economics from Columbia University in New York and also served as an economist at the International Monetary Fund.

Ori Greenfeld, head of macro research at Israel's largest investment firm, Psagot, said he thinks Flug's biggest challenge will be similar to the challenges facing the Fed in the United States.

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In his view it's "implementing an exit strategy before inflation hits. It might take a while but since the money printing machines were working overtime in Israel as well, assets prices went up, especially in the real estate market."

Gozan, IBI's chief economist added "Flug will need to focus on the shekel as its rise has threatened exports. That will be job number one."

Following the announcement, the Tel Aviv Exchange rose Sunday. In the last six months, the Tel Aviv 100 is up 9 percent.

—By CNBC's Jason Gerwirtz

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