Bank of Israel Governor Stanley Fischer said Israeli banks are strong enough to handle the possible bankruptcies of one or two of the country’s largest companies.

“It’s possible that a relatively large company could go bankrupt and we have to be ready for this,” Fischer said today at a news conference in Jerusalem. “It’s clear that the banks can handle the collapse of one or two of these companies.”

The world economic crisis has led to concern that some of Israel’s largest companies are threatened with collapse. Israel’s economy is expected to contract by 1.5 percent this year, the steepest drop in the country’s 61-year history, according to a Bank of Israel forecast presented today.

“The economic crisis has hurt property values around the world and there are definitely Israeli companies that may collapse because of their investments abroad,” Vered Dar, chief economist at Psagot Ofek Investment House, said in a phone interview.

Israel’s economy hasn’t “hit bottom yet,” Fischer said earlier in the day, at a meeting with President Shimon Peres. Still, he said the economy is beginning to stabilize and there are also signs of recovery in the financial markets.

Fischer said that the “real economy” will continue to deteriorate, pushing up unemployment.

Unemployment will probably rise to 7.7 percent this year and to 8.3 percent in 2010, the central bank said. Unemployment in 2008 was 6.1 percent.

(Bloomberg.com)