"A real, serious cut in the budget and the budget deficit is critical for Israel¿s credit rating. In the present situation, the deficit could reach 5-6% of GDP which does not meet the criteria for an A- rating such as Israel currently carries," Konrad Reuss, managing director in Standard & Poor's sovereign ratings group, told TheMarker this morning. Reuss is responsible for the group's ratings activities in the Middle East including Israel.
Reuss warned yesterday in a press release that Israel needed to implement its austerity package or risk a negative impact on its credit rating. Finance Minister Silvan Shalom used the statement yesterday in a speech on the Knesset floor to convince lawmakers to vote in favor of the controversial economic plan.
Reuss said he was up-to-date on the results of this morning's re-vote and was now waiting to see if the emergency plan would be implemented in practice. "We are aware that cuts are only part of the economic plan. We would have liked to see more cuts than what is proposed, but we are also aware of the Israeli government's political limitations." Reuss estimates that if the plan is ratified, the ratings agency will grant the government an extension in order to implement it and produce results, during which time Israel's sovereign credit rating will not be lowered. "It is not a matter of days," he explained.
S&P's Middle East desk manager emphasized that the treasury plan cannot be the end of the story, and other economic moves will have to follow. "We would like to see more flexibility. We would like to see next year's budget and we would like to see more reforms," Reus told TheMarker, stating that without further steps Israel will not be able to remove the "negative outlook" definition assigned two months ago.
Reuss explained that S&P has no firm rules regarding rating levels, and a rating reduction could be an interim "negative watch" assignation, or could go directly to BBB.