Analysts and economists responded with pessimism to Kadima's poor election showing, but there were mixed feelings about the implications a new coalition government would have on the country's economy. "The market did not like the election result and raised concerns over a coalition government with smaller parties all demanding expenditure on socioeconomic issues threatening financial stability and continuation of financial reforms started by the Sharon-Netanyahu government," said Avi Weinreb, trader at Clal Finance Batucha. Shares fell 1.8 percent on the Tel Aviv Stock Exchange on Wednesday, as trading resumed after the election day break. Despite leaving Kadima as the largest party in the Knesset with 28 seats, the number was below the expected 30 to 35 seats, followed closely by the Labor Party with 20 mandates. "I take a more pessimistic position. As a result of the increased bargaining power of the Labor Party, the Pensioners Party and Shas in a newly formed coalition with Kadima, fiscal policy might become more expensive because of increased public spending, minimum wage rise and a mandatory pension law," said Jonathan Katz, an economist at Leader & Co. Kadima head Ehud Olmert was expected to have difficulty forming a coalition, which could portend a period of instability and market volatility until central decisions are resolved. "Volatility also stems from the worry that Labor Party leader Amir Peretz will become finance minister and implement his socioeconomic agenda, such as raising social benefits," said Shay Zuker CEO of Trust Investment House. Katz also predicts the finance portfolio will have to be handed over to Labor, though Weinreb thinks Kadima will give up the defense and health portfolio but not finance. Even without the elections, strategists said Wednesday would have been a bad day for Israeli markets because of higher oil prices and interest rate changes by the Bank of Israel and the Federal Reserve. "However, clearly the election result is not good news for the economy if the largest party is not large in terms of mandates and its power to maintain fiscal control," said Vered Dar, chief economist and strategist at Psagot Ofek. Both the Israeli and US central banks raised their interest rates earlier this week. Dar added that in a new coalition government, Kadima would have to pay a higher price in terms of budget expenditure. "Worsening of fiscal control is going to happen. We will see a change in the 1% annual budget expenditure law rising to between 1.5% and 1.7%." On a more optimistic note, Zuker at Trust and Meitav CEO Zvi Stepak said giving priority in budget allocations to social issues might be welcomed by the market if the increase in expenditure would be offset by a defense budget cut. "However, in light of the threat from Iran, the Hizbollah and the likes, it is not clear, whether this would be realistic," Stepak. Analysts and economists agreed that the danger to the 2006 budget would be if the religious parties and in particular Shas, while demanding billions of shekels in budgets, joined the big coalition. "The market would like to see a coalition with Kadima, Labor, the Pensioners and United Torah Judaism adding up to 61 mandates. Such a coalition would be in a better bargaining position against Shas and Israel Beiteinu," Weinreb said. Dar at Psagot Ofek believes that the market would rather have Lieberman of Israel Beiteinu in the coalition, a right-wing economist that could balance Labor. "If Shas joins the coalition, this would mean an increase in child and other social benefits and the implementation of a mandatory pension law," he said.