The report is enclosed.   * * *  

Blue Square-Israel Ltd. is a leading retailer in Israel. A pioneer of modern food retailing, in the region. Blue Square currently operates 199 supermarkets under different formats, each offering varying levels of services and prices. For more information, please refer to the Blue Square-Israel Ltd. website at http://www.bsi.co.il/.

Forward Looking Statements

The statements contained in this release, except for historical facts, which are forward-looking with respect to plans, projections, or future performance of the Company, involve certain risks and uncertainties. Potential risks and uncertainties include, but are not limited to, risk of market acceptance, the effect of economic conditions, the impact of competitive pricing, supply constrains, the effect of the Company's accounting policies, as well as certain other risks and uncertainties which are detailed in the Company's filings with the Securities and Exchange Commission, particularly the Annual Report on Form 20-F for the year ended December 31, 2007.

   Contact:   Blue Square-Israel Ltd.   Elli Levinson-Sela   General Counsel & Corporate Secretary   Telephone: +972-3-9282670   Fax:       +972-3-9282498   Email: ellils@bsi.co.il     May 21, 2009   Public announcement   Blue Square Israel Ltd.   Downgraded, Off CreditWatch   Primary Analyst: Tamar Stein tamars@standardandpoors.com   Secondary analyst: Hila Perelmuter hilap@standardandpoors.com  

On May 22, 2009, Standard & Poor's Maalot lowered its rating on the Series A and B bonds issued by food retailer Blue Square Israel Ltd. (BSI) to 'ilA+' from 'ilAA'. At the same time, the rating was removed from CreditWatch, where it had been placed with negative implications on Feb. 2, 2009. The outlook is stable.

The downgrade reflects the erosion of the company's financial position during 2008. This can be seen in BSI's debt coverage ratios, which we no longer view as in line with an 'ilAA' rating; high leverage; and low profitability; as well as by the deterioration in BSI's market share throughout the year, which has been partially mitigated in 2009.

These negative factors are somewhat offset by BSI's strong liquidity, No. 2 position in Israel's retail sector, and diversified activities.

The stable outlook reflects our belief that BSI is taking measures (and will continue to do so) to stop the erosion in it market share[1], improve it financial ratios, and avoid massive investments that can negatively affect its financial profile and leverage.

Rationale

The downgrade reflects the weakening of BSI's financial strength in 2008, owing to the deterioration in its financial performance, heightened industry risk due to mounting competition--especially form the private discounters (which are increasing their trading volumes), and a decline in both market share and profitability. Standard & Poor's Maalot believes that the higher competition could put downward pressure on selling prices and on the profitability of all Israeli food retail chains.

The rating is supported by the company's position as the second-largest Israeli food retailer, with good nationwide coverage and diversification among several sectors (organic and nonorganic food, non-food within BEE Group, and real estate).

We continue to evaluate the possible risks related to BSI's entrance into the organic food market, which is a new segment in Israel with potential for development but with no profitability track record and relatively higher exposure to market volatility than the traditional food sector.

BSI benefits from the positive characteristics of the retail food sector, which, by nature, is predictable and less exposed than average to volatile swings in demand as a result of economic cycles. The Israeli food retail sector is also characterized by its relatively small size.