While Israel's debt-to-GDP ratio is some cause for concern, its creditworthiness is hardly in doubt, HSBC writes in its research update following the downgrade of Israel's biggest banks. While a failure to stabilize the debt-GDP ratio would undermine confidence, the biggest threat to Israel's stability is a failure by parliament to pass the 2003 budget, the investment bank concludes.

"We are where we always have been: a failure to pass the budget would be a big obstacle to financial stability," HSBC writes in its emerging markets review.

The perils of the Knesset balking at the budget include maximizing the growth of the debt/GDP ratio, and hampering the Bank of Israel from lowering interest rates on its sources, which are now at a nominal 9.1%. Moreover, the budget imbroglio could set off a "self-fulfilling panic as a shekel sell-off raises inflationary expectations again", HSBC warns.

While the direction of the government is to increase the debt to GDP ratio, given its climbing deficit on the backdrop of slowing GDP growth, "some aspects of Israel's debt stock make the overall debt burden less scary than it may look", writes HSBC. Some is guaranteed by the U.S. government, and another 9% is in the form of Israel bonds, which are not tradable.

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Israel's short-term external debt looks high at $26 billion, compared with the central bank reserves at $24.5 billion, but the nation's forex position is "robust", the analysts write. Total external debt is $66 billion, and total foreign assets are $64 billion, resulting in net total external debt of a measly $2 billion.

With Israel "practically a net creditor", then, the burden passes to Knesset, and to the Gulf. October will be an interesting month, the analysts wryly conclude: parliament returns from its summer recess, and the United States polishes its plans regarding the Middle East.