It appears the whole world is now mobilized to support Finance Minister Silvan Shalom's attempt to get the 2003 budget passed. Yesterday the international credit rating agency, Fitch, explicitly declared it will lower Israel's international rating if the budget does not pass, or if the deficit increases. Standard & Poor's said the same. Only Moody's still has confidence in Israel's economy.

This imposes a heavy responsibility on two men - Histadrut Chairman Amir Peretz and Labor Party Chairman Benjamin Ben-Eliezer. The current budget can only accommodate a small cost-of-living increase, so if Peretz insists on this, the budget will swell. At Shalom's meeting with Fitch's rating committee, the British economists asked what the outcome of the public-sector strike would be and how much the treasury would wind up paying.

As for Ben-Eliezer, if he demands that all the budget cuts in ministries controlled by Labor be rescinded, this will also bust the budget.

Why is the rating so important?

The rating determines the price that the government, as well as all Israeli companies, pay for loans from abroad. If the rating falls, interest rates rise, investing in Israel becomes less worthwhile and economic activity declines - meaning unemployment grows.

Every year, the state borrows $2.5 billion overseas to roll over its foreign debt and cover the gap between its foreign currency income and expenditures. Until two years ago, these loans bore an interest rate of 4.75 percent - the rate paid by the U.S. government - plus a risk premium of 1.75 percent. Now, the risk premium is 2.5 percent, meaning the total interest rate is 7.25 percent. This represents an effective downgrading of Israel's credit rating to the level of BBB.

If so, why the struggle to keep Israel's official rating at A-?

If Israel's credit rating were formally lowered, this would make Israel's borrowing even more expensive. It would also signal investors that investing in Israel is dangerous - and foreign investment has already been falling steadily due to the security situation. Furthermore, a lower rating would make it more expensive for Israeli banks to raise money overseas - and since the banks lend the money they borrow to Israeli firms, this would make domestic borrowing more expensive as well. This would make domestic investment less worthwhile and reduce economic activity still further.

Why didn't Fitch lower Israel's international rating?

Rating agencies are concerned with the question of whether a country can repay its foreign debts. One factor in this is its foreign currency reserves, and Israel's, at about $23.5 billion, are very high. Additionally, Israel's net foreign debt is fairly low (20 percent of gross domestic product). Fitch also paid attention to President George Bush's public expression of confidence in Israel's economy last week - an apparent indication of an emerging deal under which the U.S. would grant Israel $5-10 million worth of long-term (30-year) loan guarantees. That would drastically lower Israel's borrowing costs, to only 0.2 percent above the rate paid by the U.S., as it eliminates the risk that the loan will not be repaid.

Given all the negative economic factors - the negative growth, the declining investment, the uncertainty over the budget and the security situation - it was Bush's words that tipped the scales in favor of leaving the rating unchanged.

Then why did Fitch lower Israel's domestic credit rating?

Because Israel's domestic debt, after falling steadily for years, has ballooned since 2001, and currently stands at a whopping 85 percent of GDP.