Moody's, the global credit rating agency, has sent a signal of confidence in the economy's ability to weather political and financial shocks exacerbated by the Gaza conflict and the global credit crunch. "Israel's present political and financial shocks do not pose an immediate threat to the country's risk profile, including its A1 rating and stable outlook," said Joan Feldbaum-Vidra, Moody's analyst for Israel, in a special country report. "Our main concern for the credit rating is fiscal, given the unknowns over the cost of the military conflict with Hamas in Gaza - Israel is the only A-rated issuer with an active state of war on its territory - and the ability of the government's fiscal intervention program to deal with the credit crunch and difficult conditions in Israel's capital markets." The Moody's report added that given the uncertainties Israel's country rating could be seen as "delicately positioned" supported by the expectation that the fiscal impact of the shocks will be relatively short in duration, paid for by savings in other areas, and, most importantly, that liquidity will remain fully available. "Israel's economy has weathered extremely difficult periods in the past, at times when government debt was more burdensome and the balance of payments more fragile, which increases our level of comfort in its high rating, although we do remain concerned about the 'untested waters' now being confronted," said Feldbaum-Vidra. "Any change in our assessment of Israel's shock absorption capacity would prompt a rating adjustment." Michael Sarel, chief economist at Harel Finance, said that the Gaza conflict and the recent massive mobilization of ground troops including thousands of reservists was posing significant budgetary challenges to the state budget 2009, which was troublesome even before the conflict. "The costs of Operation Cast Lead will push the government into a record deficit this year," said Sarel. "The costs of the conflict will push the government deficit for 2009 well above 5.3 percent of GDP, the record in 2003, reaching the high levels of the 1980s. A large deficit could increase the fiscal risk premium associated with Israel, and of Israeli government bonds. The heightened perception of risk will in turn depress bond prices." Feldbaum-Vidra added that any development - external or local - challenging enough to impair Israel's debt repayments capacity in a meaningful and durable way, would likely put downward pressure on its A1 rating. Israel's rating was last upgraded in April 2008 based partly on the assessment that the structural decline in the government's debt burden would continue. "Moody's central scenario is for Israel's government debt-to-GDP ratio to temporarily reverse direction for the next two years, moving back upward from the current 80% level, before returning to a virtuous cycle subsequently," said Feldbaum-Vidra. "Even in this period of severe global uncertainty, this is consistent with Moody's practice of maintaining its ratings through temporary dislocations."