Downgrading Israel's credit rating is a blow to its image in global markets

Capture of Jerusalem- The decision by the international credit rating agency “Moody's” to lower Israel's credit rating to A2 level with a negative outlook included several messages that suggested the depth of the storming crisis in the Israeli economy due to the war on the Gaza Strip, and the general Expectations of expansion of cumulative deficit in the budget. High debt burden in Israel.

The agency described its decision to downgrade the ratings with a “negative outlook”, which could lead to a further downgrade if Israel's security, geopolitical and economic situation deteriorates due to the war on Gaza or if a wider war breaks out. Along the Lebanese border with Hezbollah.

In April 2023, Moody's cut its expectations for Israel's rating from “positive” to “stable” due to fears over amendments to the judicial system initiated by the Israeli government led by Benjamin Netanyahu and subsequent protests.

A fiery battle for Israel's economy

It is expected that this cut – the first of its kind since Israel was included in credit ratings in 1998 – will lead to:

  • Israel has to increase the interest rates on loans due to the ongoing war on the southern front and security instability on the northern front.
  • Interest rates will also become more expensive for Israeli companies and households.
  • This cut could cause – even temporarily – a decline in stock prices on the Tel Aviv Stock Exchange.
  • This cut will cause the exchange rate of the Israeli currency (shekel) to decline against foreign currencies in the near future.

The decision comes at a time when Israeli government debts stood at approximately 1.08 trillion shekels ($294.2 billion) at the end of the third quarter of 2023, and they appear to have increased since then as a result of borrowing and fund raising. War needs, as the Israeli Finance Ministry raised 125 billion shekels ($35 billion) in foreign currency by issuing public bonds abroad.

According to estimates by journalists and economic analysts, the impact of the Gaza War on Israel's reputation will be long-term, perhaps beyond the duration of the actual fighting, and the negative impact on Israeli institutions and public finances may prove far greater. Even more serious than that.

Israel's credit rating reflects the growing social and political risks associated with the current conflict on the southern and northern fronts, the weak security situation in Israel, the Netanyahu government's views on continuing the fighting, and its ambiguous position regarding the day after the war. ,

huge pressure on israel

The downgrade did not surprise the Prime Minister and senior officials at the Israeli Finance Ministry. “He tried to block the downgrade decision and talked to economists at the rating agency,” says Gad Lior, economic affairs correspondent for the Yedioth Ahronoth newspaper.

He said that Netanyahu tried to convince the rating agency that Israel's economy is stable and there is no case in which Israel has not paid the debt on time or has not come out of the economic crisis quickly, as in Israel's immediate exit. It happened with the exit. Economic difficulties during the Corona pandemic crisis.

He pointed out that the Israeli government claims that the downgrade has nothing to do with the economy, but is entirely due to the fact that Israel is waging a war on Gaza, which the government considers an additional international pressure card on Israel. . Armistice and end of fighting.

The Israeli public is not satisfied with the government's performance in the field of foreign policy (Al Jazeera)
Netanyahu's government denies responsibility for credit rating downgrade (Israeli government press office)

fear and loss

Gad Lior reported that the Israeli Finance Ministry expressed concern about the consequences for the two other major rating companies, Standard & Poor's and Fitch, if the war on Gaza continues and security tensions escalate to a broader confrontation with Hezbollah. Israel's credit rating will soon be downgraded. Front. Answer.

It is likely – the economic affairs correspondent says – that the rating will decline further “if the situation in the north turns into a large-scale conflict with Hezbollah,” which would also include a greater negative impact on Israel's infrastructure and capacity. . The economy has to be fixed.

It is expected that Israel's credit rating will decline further if a deterioration in the performance and capabilities of Israeli institutions is observed, particularly with the continued need to deploy resources for security response and military action. This would increase the potential for economic or financial damage in the medium term, beyond Moody's current expectations.

Disability and recovery

The same reading was reviewed by Adrian Villot, correspondent of the Calcalist economic newspaper, who confirmed that the decision to lower Israel's credit rating is due to the consequences of the Gaza War on the Israeli economy, as well as the lack of a clear plan for Israel. Government for the future of Gaza after the end of the fighting.

Willot said Moody's experts emphasize political, economic and social aspects to explain the unprecedented step of downgrading Israel's rating.

“This decision is another form of pressure on Israel to reach an agreement to stop fighting on the Gaza front, return to security stability and avoid a wider confrontation with Hezbollah,” he said.

Villot says the decision makes it clear that “Moody's doubts the ability of the current Israeli leadership to manage the next day, recover from the fighting, and emerge from the economic crisis, due to the high costs of the war, which has led to an unprecedented general budget deficit. “Spread out.”

He reported that Moody's did not believe the story of Israeli Finance Minister Bezalel Smotrich and Netanyahu, who tried to convey the message that the updated 2023 and 2024 budgets are “responsible” and could save Israel's economy and move it toward recovery. Can push and get out of it. crisis.

Infographic: Israel continues to suffer economic losses due to Gaza war

gap and strike

De Marker's economic analyst Avi Wachsman says the credit rating downgrade “is primarily a blow to Israel's image and position in global markets, as it is still difficult to determine the consequences of the decision and the extent of its financial impacts on Israel. Is.”

Apparently – says Faxman – “buying debt securities for any country whose rating falls becomes less attractive to investors, because they demand higher interest rates on their money. If this is the case, A rating downgrade would make the Israeli government's interest expenses higher, and even more expensive.”

It is believed that the decision to downgrade the rating obliges the Israeli government to increase debt bond issuance to finance the general budget deficit – the difference between government revenues and expenditures – which reached its peak at the end of last January. Has reached 4.8% of GDP. The cumulative deficit over the last 12 months is expected to reach 6.6% of GDP by the end of 2024.

However, the same economic analyst says that “the economic damage of the war, or at least the most probable scenario of its development, is already reflected in the interest rate that the government has to pay when it recruits abroad. and borrows money, amid concerns about issuing tradable bonds on international capital markets, to finance its activities and concerns about debt repayment.

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