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Not one shekel has been cut yet. Not one resolution has been approved. Not one reform has been executed. But the level of optimism in the capital market and business sector has rebounded at an astonishing speed.

Since the prime minister announced the appointment of Benjamin Netanyahu as finance minister, the shekel has climbed 3 percent against the dollar and currency basket. The Maof-25 index has soared by 12 percent and interest rates deriving from State of Israel Shahar bond yields have dropped by 0.5 percent to 1 percent.

Netanyahu isn't trying to lower expectations. On the contrary: "You see the markets' response," he told Haaretz proudly last week. "The economy was deteriorating; it was moments from falling into the void. We checked its [slide] and now we're starting to climb back up."

The financial markets and business sector certainly are voting confidence in the new finance minister - and in economics, confidence is of no small weight.

But the burst of optimism creates peril, too. Ministers, Knesset members and Histadrut labor federation officials may erroneously assume that the threat of crisis has been eradicated. They may, therefore, feel free to hack away at the treasury's economic program.

So let us take this opportunity to note that the degrees of freedom to tweak the Finance Ministry's austerity plan are very small indeed. Without a steep cut in public sector expenditure, the budget deficit could expand to a dangerous 6 percent of GDP in 2003. Foreign investors would flee, the business sector would choke and the danger of financial crisis would loom greater than before.

A leading economics professor who met with treasury officials last week while they were preparing the economic program was even prepared to put a figure to it: Without a program that would reduce the deficit, he calculated, the economy would hit crisis in three months.

The Finance Ministry is trying to seize the moment, and added a whole list of reforms - plans for which it's been sitting on for years - to its basic plan to slash the budget. Some are negotiable, some bear delay and others could be skipped entirely.

But the heart of the program is critical: The treasury must slash top-level wages and benefits in the broader public sector by 10-to-20 percent. This applies not only to ministry employees, but also to everybody working in anything defined as the public sector - authorities, companies or any body relying directly or indirectly on the taxpayer.

Wage cuts are a bitter medicine that the marketplace has to swallow because of the intifada and terrorism - but more than that, they are the treasury's first real attempt to tackle the destructive process that has endured for 10 years, in which economic growth and rising taxes are mostly routed to increasing public sector expenditure rather than reducing the government's portion of Israel's economic activity.

Meanwhile, back at the ranch

While the treasury presented its plan last week, another equally noteworthy event took place. The American government indicated, officially, for the first time, that it will be approving loan guarantees totaling $9 billion for Israel.

The guarantees will reduce the danger of financial crisis, since it will allow the government to convert domestic debt into capital raised on foreign markets, where Israel could not tread in the last year.

Reducing treasury offerings on the local market will have dramatic ramifications for the business sector. It will relieve the intensifying credit crunch, reduce the rates at which the government raises capital, and facilitate the slow process of lowering Bank of Israel rates.

But here, too, lies danger. If Israel gets the guarantees without being required to commit to a significant economic program, it might defer the surgery the economy needs so sorely.

After all, just how did we arrive at a situation in which the public sector swallows 55 percent or more of Israel's GDP? We got there precisely because of the last round of American loan guarantees and through aid, gifts and unilateral transfers to Israel in the last decade.

The Netanyahu euphoria, advances in Iraq and the relief over guarantees could spark a hazardous sense of glee. The finance minister must spell out to the government and public just how urgent and dangerous the situation is, and how crucial it is to shift the economy from its downward path.

At the same time, he must clarify that the treasury's plan will only check the slide; only afterward might growth be restored. This year, 2003, will be a hard one in any case - for the marketplace, for the business sector and for households, too.