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Israel will struggle to meet fiscal targets: Moody's

Israel could struggle to keep to its fiscal targets because of spending promises made by Prime Minister Benjamin Netanyahu, credit ratings agency Moody's said, warning that the new government could be "short-lived, even by Israeli standards."

"The compromises negotiated to form the latest government could lead to a deteriorating, instead of an improvement, in the budget deficit in 2016," Moody's analysts, led by Kristin Lindow, said in the report Thursday. (Tweet This)

The comments came as Israel's new cabinet, under re-elected Netanyahu, was sworn in to parliament - the Knesset. The cabinet is a coalition of Netanyahu's Likud party and a number of smaller orthodox and right-wing parties, to whom Netanyahu made compromises on spending pledges in order to gain their support.   

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Israeli Prime Minister Benjamin Netanyahu addresses a joint meeting of Congress in the House Chamber on Capitol Hill in Washington, March 3, 2015.
Gary Cameron | Reuters

The governing alliance of five parties might not only be an awkward one, but could damage Israel's attempts to cut government spending, Moody's said.

The new finance minister may have difficulty in bringing the fiscal deficit down from 2.5 percent of gross domestic product (GDP) to the 2 percent targeted for 2016, the analysts said, "if the varied demands of coalition members are actually implemented."

'Expensive concessions'

Netanyahu has taken almost two months to form a governing alliance since his unexpected election win on March 18, which has already raised eyebrows among the business community.  

The new government will have 61 seats in the 120-seat Knesset, giving it a tiny majority. To make matters worse, disagreements over portfolios have already started.  

Yesterday, there was heckling in the Israeli parliament following a tense day of disagreements between Netanyahu's senior Likud officials about the distribution of ministerial positions. 

Given the already tense government relations, Moody's was not optimistic about the governing coalition's chances.

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A key pressure point facing the new coalition will be incoming finance minister, Moshe Kahlon's, 2015 budget, the analysts said, "disagreement over which was the cause of the last government's collapse." 

"The budget negotiation process is likely to be nearly as contentious as forming the government given the generous concessions promised to entice each of the five parties to join the coalition," Moody's Lindlow and colleagues said. 

"Likud committed to roll back many of the significant reforms made by the previous Netanyahu-led government."

Among the expensive concessions were agreements to exempt certain food products, such as baby food, from value-added taxes (VAT) and to increase child allowances. The total cost of these changes is estimated at 8 billion Israeli New Shekels ($2 billion) or just under 1 percent of gross domestic product (GDP), Moody's said.

"Given the contentious nature of the government formation process and the fact that a single MK (member of the Knesset) defector could cause the government to collapse, the government may be short-lived, even by Israeli standards," Lindlow added. 

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld