Fitch and friends

Why the agency didn't downgrade Israel and why Silvan Shalom's friends could change that
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Treasury officials cheered yesterday when international rating company Fitch decided to affirm Israel's sovereign credit rating. The ministry gleefully hastened to put out a press release that trumpeted all the pluses in the Fitch study.

But the truth is that neither the treasury nor Israel's taxpayers have anything to crow about. If anything, even though Israel's credit rating was not downgraded, we should be deeply concerned.

First of all, these rating agencies are not oracles. Their forte is reporting on the past. Even if Fitch, S&P and Moody's refrain from downgrading Israel, that doesn't mean much for the future. It merely describes the current situation.

Second of all, while the treasury's press release radiated optimism, the Fitch report did not. It warned of an increasing government shortfall and claimed that the official deficit of about 3% is not representative. It claimed that the real figure is the "general government deficit", which is a wider 5%.

Third and most important of all, most of the parameters rating companies address in their studies are ones demonstrating long-term structural changes in the Israeli marketplace, which are not subject to sudden change.

The key item is Israel's debt structure: the magnitude of its external debt, its average term, and its sources. For instance, the main factor to Israel's credit is that half its external debt carries an AAA U.S. federal guarantee, and a further one-third is held by Israel bond-holders¿ wealthy Jewish families living in the United States.

Israel's debt structure attests not only to its dependence on the United States and the Jewish community living abroad, but mainly to economic developments of the last decade. It says nothing about the future.

The grass isn't greener over there any more
Remember that in Fitch's last report of May 2001, it warned that Israel's long-term economic prospects were negative. It stressed the escalating hostilities and specifically mentioned the Israel Air Force bombing Nablus.

It could be that although the tensions have done nothing but escalate further, Fitch and the other rating firms have grown more tolerant of the situation. After the terror attacks on the United States, Israel's situation no longer seems unique.

In other words, our situation may seem relatively better because it seems worse in the rest of the world. That is not particularly encouraging.

The treasury should not gloat about Fitch's report, or the one S&P published a month ago. Next year could well prove to be one of the worst the Israeli marketplace has known. The business sector certainly hasn't heard anything to indicate otherwise.

The treasury's childish clinging to its forecast of 4% GDP growth looked bizarre when first put out months ago. The more the Finance Minister mulishly refuses to admit that 1% or 2% is a more realistic target, the less confidence the business sector has in him.

Sticking like glue to the treasury's preposterous forecast obviates the need for an immediate budget cut, and to nullify two partisan new laws ¿ the Negev Law, and the Large Families Law.

Silvan's friends
News from the treasury in recent weeks does not relate to budget cuts or reforms, but to resignations and attempts to name political appointees to key positions.

The Finance Ministry has a history of crony appointments. No party is innocent of political finagling, it's part of the game. But for the first time in many years, the feeling is that the treasury's politicization has stepped up to a whole new level.

Incumbent Finance Minister Silvan Shalom has yet to name people for the positions of State Revenue supervisor and Budget Director, or to decide whether to re-appoint Income Tax Commissioner Yoni Kaplan. It arouses the suspicion that he'll only do so when he finds his kind of people who faithfully go to where "his mind is at".

Which begs the question, where is his mind at? Is it still fixating on being elected Israel's next prime minister? Or has he grasped that through no fault of its own, Israel is slipping into the worst of economic times, and that it will need economic leadership no less than it needs political and military leaders?

Unless Silvan Shalom comes to his senses, he could find himself going down in history as Israel's worst finance minister ever.