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Israel has high levels of economic, institutional and financial strength, and the country's recession now appears to be over, Moody's Investor Services said yesterday in its annual report on Israel.

The international rating agency left Israel's long-term government foreign currency bond rating at A1 with a stable outlook.

Moody's said Israel's economy has largely weathered the global meltdown, but warned the country's small size means robust growth hinges on developments abroad. It added short-term prospects were relatively good.

The Bank of Israel raised interest rates on Monday, an indication it saw the worst effects of recession fading and inflation as a growing threat.

In addition, Moody's noted the 1% economic growth in the second quarter compared to a 3.2% drop in the first quarter of the year.

A few weeks ago ratings agency Standard & Poor's decided to leave Israel's credit rating unchanged at A.

Moody's upbeat outlook reflected the absence of the main sources of the global crisis: toxic bank assets or a real estate bubble. Israeli banks have traditionally been conservative lenders compared to their colleagues in the United States and Europe, shielding them from the worst of the global credit crunch.

The annual report followed a visit two months ago by representatives of the firm, who met with senior Israeli officials including Finance Minister Yuval Steinitz, central bank governor Stanley Fischer, and other senior representatives from the private and public sectors.

The Moody's report said Israel's rating would be stronger if it could resolve its conflict with the Palestinians and reduce its military spending, currently running at about $10 billion annually.

Renewed efforts to improve Israeli-Palestinian relations would be important validation of the country's A1 government rating, it said. U.S. government figures say Israel's military expenditure for 2008 was equal to 7.3% of its gross domestic product - one of the highest levels of military spending in the world.

Steinitz lauded the rating agency's move yesterday.

"This is further support from an important ratings company," he said. "Moody's published its report on Israel about a month after the two-year budget was approved by the Knesset. We see that as testimony to the Israeli economy's respectable weathering of the international economic crisis. This is at a time when many countries have suffered a significant ratings reduction recently. The Finance Ministry will continue to lead the implementation of the economic plan and two-year budget in order to complete the stabilization of the economy in preparation for rapid economic growth in the future."