Moody's decision to cut Israel's credit outlook is not a mere bump in the road

The rating agency's economists left no doubt as to the reason for lowering Israel's forecast; while praising the previous government, they provided a detailed critique of the hasty legislative process of the current government's legal reform, and its detrimental effects on all citizens; however, they stressed that it’s not too late to change course

Any government can blame its predecessor for many moves and economic data, but the scathing report of credit rating company Moody's published over the weekend blocked even this possibility. On the contrary. The current government is the only one to blame for the situation, which it created itself.
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The report of the respected and prestigious rating company is sharp and clear: Moody's economists explicitly praise the State of Israel's economy during the days of the previous government, for which Moody's set a "positive" rating for the Israeli economy.
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בנימין נתניהו, בצלאל סמוטריץ' אלי כהן וניר ברקת
בנימין נתניהו, בצלאל סמוטריץ' אלי כהן וניר ברקת
Prime Minister Benjamin Netanyahu and Finanace Minister Bezalel Smotrich
(Photo: Yonatan Sindel)
On the other hand, the economists state unequivocally: the legal reform legislation process, which the current government started running too fast, is the one and only reason for downgrading the rating outlook on Israel's debt from "positive" to "stable". A very bad decision for the future of the Israeli economy.
This report is a crushing answer to the hymn sheet of the Netanyahu-Smotrich-Rothman choir, who have been singing for three months the words "The reform will only do good for Israel's economy". This song went silent for good over the weekend.
Moody's did not mince words in its criticism this time and used a very clear language:
The change of the forecast to “stable” from “positive” reflects a deterioration in the governance in Israel, as illustrated by the recent events surrounding the government's proposal to change the legal system in the country. The economists do not hide behind words like "may", "might", "possible damage", "certain damage". In the most explicit way, Moody's uses the unambiguous words "reflects deterioration".
And not only that. If the Netanyahu-Smotrich-Rothman choir was expecting another chance possibility to reiterate their mantra "The previous government left us with a difficult economic situation", one of the three largest and most respected credit rating companies in the world came and explained explicitly that the recent events in Israel offset the positive developments that led it to assign a positive outlook in April 2022, related to strong economic and budgetary performance and the implementation of structural reforms by the previous government.
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   ליברמן בכנס של אוניברסיטת רייכמן
   ליברמן בכנס של אוניברסיטת רייכמן
Former finanace minister Avigdor Liberman - Moody's economists praised his actions
(Photo: Shaul Golan)
This time, the prime minister and the finance minister cannot hide behind claims of left-wing bias, wishes to overthrow the government, biased economists. Definitely not. This report serves as a stark warning for Israel that if legislation goes full steam ahead, it’s not only the forecast that will be downgraded, but also the country’s credit rating itself for the first time in the history of Israel's economy.
The cynics will come and claim: "Then what will happen? Let them downgrade it. We are an independent country and we will do what is best for us, without taking into account some insignificant report of some company that also has interests."
So let's clarify how an Yaron Israeli from Or Akiva, or Orna Abrahami from Be'er Sheva will be harmed by a credit rating downgrade if the government does not withdraw from its legal reform legislation that will harm the democratic values of the State of Israel:
The interest rate on the country’s debts will immediately skyrocket. It is about the new debts and also about the unfeasibility of refinancing existing debts. Bank interest rates will rise immediately and citizens will pay more for their loans, including a dangerous hike for mortgage holders, who may no longer be able to meet their monthly payments.
A credit rating downgrade will keep investors away from here. Companies with debts may be forced to reduce activity, become more efficient quickly, lay off employees and possibly also reduce the wages of some of their employees. Two of those who may be sent home or unable to meet their mortgage repayments are Mrs. Abrahami from Be'er Sheva and Mr. Israeli from Or Akiva.
The government of a country whose credit rating is cut and whose loans become more expensive will be forced to cut back on its budget and reduce services to citizens. Maybe a family health center in Ra'anana will be closed and the overcrowding in the classrooms at the school in Dimona will be exacerbated. Local authorities will also respond with cuts. It is possible that the garbage will be collected only twice a week in Ashkelon or Zichron Yaakov.
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ההפגנה נגד המהפכה המשפטית בתל אביב
ההפגנה נגד המהפכה המשפטית בתל אביב
Anti-judicial reform protest in Tel Aviv
(Photo: Yariv Katz)
And these are just some of the consequences of a rating downgrade. The Startup Nation, which everyone happily wanted to do business with in recent years, will suddenly turn into a kind of a leper. Why bother with a country that is less certain to be able to service its debts in the future and with a legal system controlled by the government?
But it's still not too late. Moody's has highly valued the Israeli economy over the years and therefore expressly states that it is not too late and Israel's economy is still stable and robust.
Moody's leaving Israel's A1 rating intact reflects the country's strong economic growth and improving budgetary strength, which is expected to continue in the near future. Moody's baseline scenario assumes solid growth for Israel in the medium term.
While Moody's does not expect the proposed reforms to pass in their original form, it remains uncertain whether a compromise can be reached. Furthermore, the government has reiterated its intention to alter the process of selecting judges. Moody's report also highlights the substantial risk of renewed protests in Israel.
Moody’s acknowledges the strength of civil society in Israel as shown in events since the beginning of the year, but economists remain concerned about the deeper divisions recently exposed within Israeli society.
It notes the risk to Israel's social and political stability, as well as its economic strength, may last for some time, overshadowing judicial changes. Greater polarization has the potential to undermine policy effectiveness and Israel's economic prosperity in the medium term.
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הרצוג נואם בטקס פתיחת תערוכת ספר השמות של יד ושם בירושלים
הרצוג נואם בטקס פתיחת תערוכת ספר השמות של יד ושם בירושלים
President Isaac Herzog
(Photo: Rafi Kotz)
While it is unfortunate, it is clear that the heads of the credit rating company do not share the prime minister's optimism regarding legal reform. Despite attempts to persuade President Isaac Herzog of ongoing productive negotiations leading to a prompt compromise, Moody's report does not reflect confidence in these promises.
The actions of the two heads of state could be considered a source of shame, as their calls and pleas to Moody's executives in a panic were unable to prevent the downgrade of Israel's outlook, despite their efforts. Despite their explanations, Moody's executives listened, thanked them for their time, and proceeded with their previously formulated decision.

What’s next?

If the legislative process continues, it is estimated that the other two rating companies, Standard & Poor's and Fitch, will react accordingly and explicitly threaten to downgrade Israel's credit rating when the reform legislation is approved. Then it will be very difficult for the Netanyahu-Smotrich-Rothman choir to continue singing: "The reform will only do good for Israel's economy."
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