Netanyahu Weakened in Israeli Election as Lapid Surprises

Photographer: Ilia Yefimovich/Getty Images

Yair Lapid, chairman of Yesh Atid party meets a supporter as he visits a polling station to cast his vote in the Israeli General Election in Netania, Israel on Jan. 22, 2013. Close

Yair Lapid, chairman of Yesh Atid party meets a supporter as he visits a polling... Read More

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Photographer: Ilia Yefimovich/Getty Images

Yair Lapid, chairman of Yesh Atid party meets a supporter as he visits a polling station to cast his vote in the Israeli General Election in Netania, Israel on Jan. 22, 2013.

Israeli voters gave Benjamin Netanyahu the chance to serve a third term as prime minister with a weaker mandate than four years ago, leading him to seek an alliance with rising star Yair Lapid.

Netanyahu’s Likud-Beitenu list won 31 seats in the 120- member Knesset, down from 42 at present, according to projections by Haaretz newspaper based on a near-complete count. Lapid’s Yesh Atid party took 19 seats by stressing the need to cut housing costs and bureaucracy, and draft ultra-Orthodox Jews into the army. Netanyahu’s coalition partner Jewish Home, led by Naftali Bennett, more than doubled its seats to 11 on a platform of opposing a Palestinian state.

“The results are an opportunity to make changes that the citizens of Israel seek,” Netanyahu told supporters in Tel Aviv after posting a message on Facebook that he had already invited Lapid, a popular television news host, to join him. “I intend to lead these changes and for that we will have to form as wide a coalition as possible.”

The new government’s makeup may determine the outcome of issues from cutting the budget deficit to whether Israel bombs Iran to peacemaking with the Palestinians. With his own bloc holding fewer seats, Netanyahu may be more dependent on partners who don’t agree with all his economic and diplomatic policies.

‘Poor Campaign’

“Netanyahu ran a poor campaign,” said Gerald Steinberg, a political science professor at Bar Ilan University outside Tel Aviv. “His weaker position may force him to form a more centrist and broader government with the Yesh Atid party as his main partner.”

Israeli stocks gained the most since Jan. 1 after Netanyahu’s pledge to form a wide alliance. The benchmark index was up 1.6 percent at 2:48 p.m. Yields on the shekel bond maturing in 2023 fell 5 basis points to 3.99 percent, and the currency strengthened 0.2 percent against the dollar.

The process of coalition-forming typically takes weeks. It starts with President Shimon Peres formally asking the head of the winning party to open negotiations with smaller parties. If he or she can’t form an alliance commanding a Knesset majority within six weeks, the second-place party gets a chance.

Lapid, a 49-year-old television interviewer, focused his campaign on issues he said were important for Israel’s middle class, which joined protests in recent years against high living costs. He told a rally in Tel Aviv that he hoped to “unite the moderate forces from the right and the left so that we can bring about a real change.” Netanyahu said he told Lapid “we have the opportunity to do very big things” for Israel.

Settlement Plans

Within Netanyahu’s current coalition, Bennett’s Jewish Home gained seats while the premier’s list declined. Bennett, the son of American immigrants from San Francisco, is a former Netanyahu aide who founded a software company and then sold it for $145 million. He has campaigned against talks aimed at creating a Palestinian state, and backed the construction of more Jewish settlements.

Those views resonate with supporters of Netanyahu’s Likud, even though the premier’s official position is to support a two- state solution, the outcome favored by the U.S., Israel’s main financial supporter. Netanyahu has also supported the extension of Jewish settlements, sometimes leading to tensions with President Barack Obama.

“The new Israeli elected leadership must make the first step to make peace, which is halting settlement, mainly in Jerusalem,” said Ahmed Assaf, a spokesman for the Palestinian Fatah group which governs the West Bank. “If Israel does so, the Palestinians will be ready to get back to negotiations to achieve real peace.”

‘Sister Parties’

With Jewish Home and Netanyahu’s Likud close on many issues, the premier will want to keep the party in his coalition to avoid further divisions, said Asher Cohen, a professor of political science at Israel’s Bar Ilan University.

“They are really sister parties,” he said. “There were a lot of attacks and rifts, and I’m not sure that the Likud will want to leave the Jewish Home in the opposition, and make this situation worse.”

A new party headed by former Foreign Minister Tzipi Livni, the only major candidate to stress renewing peace talks with the Palestinians, gained six seats. Lapid also expressed support for a two-state solution while mostly refraining from criticizing Netanyahu on diplomatic affairs.

Since the start of Netanyahu’s second term in March 2009, Israel’s benchmark stock index has climbed 64 percent and the shekel has surged 13 percent versus the dollar.

Budget Cuts

The likelihood that Netanyahu will remain prime minister is good news for Israeli energy companies, which are mining a bounty of offshore gas deposits, and Israel Chemicals Ltd. (ICL), an acquisition target by Canada’s Potash Corp. of Saskatchewan Inc., said Gilad Alper, a senior analyst at Excellence Nessuah Investment House Ltd. With the prospect of higher taxes, he said, “the banking sector is likely to suffer modestly.”

To maintain the long-term prospects for the economy, which has rebounded from the global crisis faster than most developed peers, Netanyahu says Israel needs to trim the budget deficit. The gap widened to 4.2 percent of economic output last year as the economy slowed. Netanyahu is seeking 14 billion shekels ($3.8 billion) of cuts this year to bring it down to 3 percent. He called the election a year ahead of schedule after failing to get coalition partners to agree on the measures.

‘Very Dependent’

The main opposition Labor party, set to finish third with 15 seats according to Haaretz, campaigned largely on social welfare issues, and may oppose cuts in social spending.

Labor leader Shelly Yachimovich said after results came in that Lapid should join her party to topple Netanyahu’s “extremist government.” The ultra-Orthodox Shas party, another Netanyahu ally which won 11 seats, has also opposed parts of his economic program.

Whatever permutation he ends up choosing for a new coalition, Cohen said, the election results mean that “Benjamin Netanyahu is very, very dependent on partners.”

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Calev Ben-David in Jerusalem at cbendavid@bloomberg.net; Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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