By Steven Scheer and Tova Cohen
JERUSALEM, Feb 9 (Reuters) - Israel markets want a swift and credible budget and a stimulus package to help counter the likely slide into recession, whoever wins this week's elections.
Asset prices have been sinking on the heels of the global downturn and Israel is using a pro-rated budget from 2008.
The winning party in Tuesday's election will have six weeks to form a coalition and the first order of business will be to pass a budget for 2009.
"Should the formation of a new government turn out to be very protracted, thus creating a delay to the approval of the 2009 budget and a fiscal stimulus plan, that would have negative consequences for the 2009 growth outlook," Reinhard Cluse, an emerging markets economist at UBS, said on Monday.
Markets have already factored in the prospect of a budget deficit of at least 4 percent of gross domestic product in 2009 -- double that of 2008 -- due to the need for higher spending on the economy and as tax revenues slide.
The current government has already boosted spending to deal with the crisis and allow for the supply of credit, but the swift passage of a budget that does not surrender to populist spending measures is deemed crucial.
Israel holds an election on Tuesday to replace Prime Minister Ehud Olmert, who quit after a number of corruption scandals. All 120 parliament seats are also up for grabs.
The poor state of the economy has however taken a backseat to security and peace talks with the Palestinians following three weeks of fighting in Gaza.
The central bank forecasts a 0.2 percent contraction of the
economy this year after growth of 4.1 percent in 2008. Tel Aviv
share indexes plunged some 50 percent last year, but have
recovered slightly so far in 2009. The shekel
WHO CARES, WHO WINS?
Israeli financial markets are less concerned over who wins the election than how quickly a governing coalition can be built and whether it will be stable enough to resist pressures to boost spending. "I think there's a general feeling now that with the three major parties politically there's not a real big difference," said Jonathan Katz, an Israel-based economist with HSBC.
"The important thing is that you see a coalition shaping fairly rapidly that includes more central parties," Katz said.
Polls show Benjamin Netanyahu's right-wing Likud party narrowly beating Foreign Minister Tzipi Livni's centrist Kadima with far-right party Yisrael Beiteinu leaping into third place ahead of the left-centre Labour Party.
"One of the biggest questions is how long it takes to build a new government and how quickly can the government prepare any fiscal stimulus package," said Cluse.
With no party expected to win more than 30 mandates in parliament, a coalition government will be cobbled together to reach at least 61. Coalitions are often put together with smaller parties -- each with their own political and economic agendas and requiring higher spending for their interests.
"You want to have a situation where the government functions easily without being held ransom by smaller parties," said Neil Corney, a managing director at Citi. "The stronger the larger parties ... (the better) for the economic situation."
The Bank of Israel has carried the bulk of the economic stimulus, slashing its key short-term borrowing rate by 3.25 percentage points to just 1 percent the last four months.