US credit crisis to have limited impact on Israel

The historical decision by credit- rating agency Standard & Poor's (S&P) to downgrade the United States rating from the top grade AAA to AA+ won't affect the Israeli economy drastically in the long run, local analysts told Xinhua, although the credit crunch has caused the Israeli stock market to fall sharply on Sunday.

Following months of tough negotiation between the Republicans and U.S. President Barack Obama, a deal was reached last week to raise the U.S. debt ceiling, allowing Washington to continue borrowing money to pay its bills.

The debt ceiling has been raised for numerous times in the past, but what promoted S&P to take the decision was the lengthy process leading up to the deal, which had shown that the U.S. government's ability to handle its finance was now "less stable, less effective and less predictable."

Dr. Israel Waismel-Manor of the University of Haifa said that the Republicans see the debt crisis as an opportunity to turn Obama into a one term president.

Representatives from the Israeli Ministry of Finance, Bank of Israel and the Securities Authority meet on Saturday following the S&P downgrading and discussed its long term effects and financial volatility in Israel and across the world.

"Israel's macroeconomic situation is good, and so far the debt crises abroad have had a limited impact on Israel, due to its macroeconomic strength, achieved by means of adherence to fiscal discipline, among other things, in the last few years," the statement said.

Dramatic Market Reaction

Tel Aviv Stock Exchange's main TA-25 index fell by 7 percent on Sunday in reactions to the U.S. credit downgrading.

Prof. Michael Beenstock from the Hebrew University of Jerusalem said that the Israeli market won't be seriously affected in the longer term.

"The rating agency has simply said something that everybody has already known," Beenstock said.

He argued that the reaction on the stock market was an example of psychologic effects. "Everyone was frightened by the downgrading. The fear would cause people to sell. It has become a self-fulfilling prophecy," he said.

"We have been through this in 2008, when everybody thought that the world was coming to an end," Beenstock said, referring to the global financial crisis started three years ago.

"Nothing has really changed on Friday night," Beenstock said, " So this is a panic reaction."

Harming Exports

Prof. Dan Peled of the University of Haifa said that Israel's export might suffer from the downturn of economic development in the U.S. and Europe.

"The U.S. is a very significant export market for us," Peled said.

Traditionally the U.S. has always been one of Israel's most important export markets, but Peled argued that if America's economic situation doesn't improve, Israeli companies may continue to focus their efforts on India and Asian markets instead in the coming three to five years.

Ever since it became clear that the U.S. economy would suffer in the aftermath of 2008 global financial crisis, many Israeli export firms had begun turning their attention eastwards to find new markets for their products.

Asked about how the Bank of Israel and the Ministry of Finance have been handling the situation so far, Peled said that they are just keeping tabs on the situation at the moment and "they aren't trying to do anything because they can't do anything," as the entire situation is depended on what is happening between the politicians in Washington.

"The reaction so far by the economic leaders of Israel and its institutions is just the right one," Peled said.

[Source: Xinhua, Jerusalem, 08Aug11]

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