S&P drops Israel’s credit rating after Lapid suggests raising deficit

Credit-rating agency Standard and Poor’s lowered Israel’s rating in local currency on Thursday, a day after Finance Minister Yair Lapid suggested raising the country’s deficit to a record high.

S&P cited the country’s decreased fiscal performance and monetary policy as reasons behind the move to drop Israel to A+/A-1 from AA-/A-1+.

However, it said Israel’s rating in foreign currency would stay the same at A+/A-1.

“The lowering of the local currency rating results from recent fiscal slippage, highlighting the gap between fiscal performance and other key metrics such as economic performance, external balances, and monetary policy flexibility,” the agency said in a statement.

Though the group listed Israel’s outlook as “stable,” it said the rating could drop further if the country did not take action to lower its debt, or if security problems persisted.

“We believe that a significant setback in reducing the government’s high debt burden, a decline in growth prospects, or a substantial deterioration of the security situation in Israel could put downward pressure on the rating,” the statement read.

In response, Lapid said S&P’s move was “unsurprising” and constituted a “late reaction” to the situation his ministry was now “attempting to rectify.”

He said his own actions were “responsible,” adding that he aimed to alleviate Israel’s overdraft within the next two years.

Another credit-rating agency, Fitch, said Thursday that the requested increase was larger than expected, raising worries that Israel’s economic status would deteriorate on the global stage as a result of the move.

Lapid announced Wednesday that he intended to increase Israel’s budget deficit ceiling from 3 percent to a record 4.9%. The Bank of Israel has previously shot down requests by Lapid to raise the deficit ceiling from 3% to 3.5%.

The announcement, which would see NIS 6.5 billion in budget cuts and tax raises, surprised both Prime Minister Benjamin Netanyahu and outgoing Bank of Israel Governor Stanley Fischer, who were not informed of it by Lapid in advance.

A source close to Netanyahu told Channel 10 that Lapid’s proposal, which is set to be discussed by the Cabinet on Sunday, drew ire from government circles for its sudden nature.

On Thursday, Netanyahu’s bureau chiefs convened with Finance Ministry and Bank of Israel representatives to try to resolve the matter. Netanyahu and Fischer are set to meet this weekend to discuss Lapid’s proposal.

Lapid received kudos from his rivals in the opposition Thursday for his plan to put NIS 6.5 billion back into the budget, with opposition head Shelly Yachimovich (Labor) praising the move and calling it the “right step.”

Aryeh Deri, leader of the ultra-Orthodox Shas party, also expressed approval of Lapid’s modifications. “The government will have our full support in any sensible decision it pursues,” he said, but added that his party still planned to fight the intended cuts.

Lapid earlier proposed a plan to reduce the country’s NIS 39 billion-deficit by NIS 13 billion through a program of raised taxes and cuts to ministry budgets and public entitlements. However, he ran up against opposition from politicians and union officials, who said they would not allow slashes to state worker salaries or ministry budgets. Others had opposed Lapid’s proposal to increase sales and income taxes.

Lapid had defended the austerity plan as a painful but necessary measure to rein in the deficit and prevent further financial troubles down the road.