Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz have so far evaded the hard questions about the budget cuts and tax hikes needed to meet the new and higher deficit target, but that may now end. Sources inform ''Globes'' that a team from Standard & Poor's is in Israel and that this year's talks will not be easy, as S&P will demand explanations about the significance of Netanyahu's decision, based on Steinitz's recommendation, to double the 2013 deficit target from 1.5% to 3%. The team will also want to know what operative measures the government plans to take to achieve the new target, given that officials and analysts expect the actual deficit to hit 4.5% of GDP in 2013, after the 2012 deficit will exceed the 2.5% target to reach 4%.
The team will meet with senior officials from the Ministry of Finance, Israel Tax Authority, and Bank of Israel, as well as executives from the financial system and top economists. The team will then write S&P's annual report on Israel and give a credit rating
The sources said that the team will meet with Steinitz tomorrow. His aides are not concealing their expectations that S&P will keep its Israel rating unchanged, after raising it to A+ last year.
Israel's credit rating reflects the risk level of government bonds. The rating is a critical figure for raising capital on international markets, because it affects the interest on bonds issued and the cost of raising them. There is a direct inverse correlation between the rating and the interest rate.
The rating companies have unprecedentedly punished countries that have failed to demonstrate fiscal responsibility by slashing their credit ratings. Key factors are the size of the government debt and deficit. Israel's government has been steadily falling for years, reaching 72.4% of GDP, and is one of the country's signature achievements. But Bank of Israel figures show that the interest on the government debt is 4% of GDP, similar to the 4.2% of GDP paid by Portugal, whose debt is 107.8% of GDP and the 4.5% paid by Italy, whose debt is 120% of GDP. The reason is Israel's historically high risk premium.
Israel's geopolitical situation also affects its rating, and Israel's position has deteriorated in the past year, due to the events in Iran, Egypt, and Syria.
Published by Globes [online], Israel business news - www.globes-online.com - on July 3, 2012
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