Olmert's Instability May Hurt the Economy

Olmert has survived one political and corruption crisis after another, but his shaky government may have a negative domino effect on the economy.

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Tzvi Ben Gedalyahu,

Prime Minister Ehud Olmert has survived one political and corruption crisis after another, but his shaky government worries the Standard & Poor's financial assessment firm. The firm is studying whether to downgrade Israel's debt rating, as fears of a recession grow.

Finance Minister Roni Bar-On (Kadima) tried to convince S&P analysts that everything is coming up roses, if not shekels, for the economy, which until last year was praised as one of the most stable and impressive in the world.

Soaring economic growth, for which most economists credit former Finance Minister Binyamin Netanyahu, continued for several years and reached six percent without the long-standing tradition of accompanying inflation and devaluation of the shekel.

Of late, however, the shekel-dollar rate plummeted from 4.70 less than three years ago to 3.20 several weeks ago. The impact on the Israeli psyche has been huge, with consumers and investors slowly getting used to the idea of quoting prices in shekels and not in dollars.

The zero inflation rate that dominated the economy until last year represented an unprecedented reversal in the inflationary mindset that had previously always caused Israelis to run out and spend before prices rise.

Olmert's political troubles have not caused the current slowdown in growth, but if they cause S&P to lower Israel's bond rating, it will make it more expensive for Israel to borrow money and could have a domino effect on the sagging economy.

"We have forgotten that the rating companies also know how to downgrade, especially in times of economic and financial instability, and in the case of Israel, political instability as well," a senior Bank of Israel official told Globes.

Last year, S&P was so impressed by political and economic stability that it raised Israel's credit rating in November, exactly when the current financial thunderbolt struck American financial markets, causing a tidal wave of worries around the world.

Consumer confidence polls have showed that a recession is not on the horizon, but they also show gloomy prospects into the beginning of 2009.

Israeli analysts until recently were confident that the country could weather the storm, but the current political crisis, with the guillotine of indictments hanging over Prime Minister Olmert's head possibly the straw that breaks the economy's back.