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Wednesday, 25 September, 2002, 13:55 GMT 14:55 UK
Downgrade risk hits Israeli markets
An elderly Palestinian man walks past a checkpoint and a nervous Israeli soldier
Heightened security is costing Israel's economy dear
Shares in Israeli companies have taken a battering as concern began to spread that the international credit ratings agencies could be about to downgrade the country's debt.

The fears follow news late last week that Standard & Poor's, one of the agencies, had marked down Israel's two biggest banks, both of which are struggling in the face of Israel's long-running recession.

The Tel Aviv stock exchange's TA-25 index fell 1.6% on Tuesday to 349.61, barely above the year's nadir of 348.11 - itself a three-year low.

The shekel, meanwhile, was slightly weaker at 4.88 to the US dollar, continuing a steady slide established in mid-August.

Slowdown gathers pace

Israel's economic problems are now well-established.

The global slowdown hit its export-oriented industries hard, particularly the cluster of high-tech firms which sprung up thanks in part to support from the Israeli military in the 1990s.

After breakneck 7% growth in 2000, last year produced a 0.9% contraction, while inflation and unemployment are both heading upwards.

Add the continuing heavy security spending triggered by the two-year intifada in the occupied territories and the suicide attacks by Palestinian extremists in Israel itself, and the fact that Israel's budget is heading for a massive deficit is little surprise.

Safe in our hands

The finance ministry insists that both the deficit and the rating are under control.

Earlier this week, accountant-general Nir Gilad said spending cuts would compensate for a shortfall in tax revenues, allowing the deficit target of 3% of gross domestic product to be met.

As for the credit agencies, he insisted that despite parliamentary opposition to the budget the sovereign debt rating was in no danger.

"There has been no real change in our situation from the last meetings we had [with the agencies], so there is no real threat for an immediate downgrade," he told Reuters.

Sceptical observers

But that cuts little ice with some observers, not least analysts at US investment bank Goldman Sachs.

"We have been expecting downgrades since April," wrote Daniel Tenengauzer, one of its economists, in Goldman's weekly survey of the Israeli economy.

The press release on the Bank Leumi and Hapoalim ratings had highlighted changes to the wider economic environment, he wrote.

"This hints that a downgrade of the sovereign might follow."

Israel's central bank is desperate to avoid a downgrade, and reaffirmed its stance this week by refusing to lower interest rates from their current 9.1% level.

"Ongoing geopolitical uncertainty and still high inflation shold keep the key interest rate unchanged well into next year," Mr Tenegauzer wrote.

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