In addition to dropping its rating down one notch from A1 to A2, Moody’s stated that the Jewish state’s outlook moving forward is negative. Although A2 is still considered an investment-grade rating, it will likely result in making borrowing money more expensive for Israel.
They said that the decision was based on their “assessment that the ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.”
Moody’s warned a few weeks after the attack by Hamas on Israel in October that its credit rating could be downgraded, noting that although military conflict did not affect the country’s credit profile much in the past, the severity of the new situation made it more dangerous for its credit.
Part of the reason for this assessment is that the ongoing conflict will lead to much bigger deficits than expected in the coming years. They believe that Israel’s defense spending could end up being almost twice 2022’s level by the end of this year and could grow even higher in the years to come.
The Israeli Knesset has been trying to iron out is budget for this year, with one proposal seeking to cut spending on government agencies by 3% across the board.
Moody’s noted that there is a “significant” risk of escalation, with the involvement of Hezbollah a real possibility, and this is something they maintain will pose a bigger risk to Israel’s territory.
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Recently, a standalone aid package for Israel of more than $17 billion from the U.S. failed to advance in Congress. Representative Thomas Massie (R-Kentucky) wrote on X: "Israel has a lower debt to GDP ratio than the United States. This spending package has no offsets, so it will increase our debt by $14.3 billion plus interest. I’m a No."
The U.S. national debt now exceeds $34 trillion, and Americans are growing increasingly disillusioned with the country’s generous handouts to places like Ukraine and Israel while domestic problems go largely ignored.
As the war enters its fifth month, the death toll in Gaza is said to be near 28,000, and the country has drawn condemnation from around the world for the effects of its campaign on Gaza’s civilian population.
That death toll could climb even further as Israel prepares to enter a new phase of its war. With Palestinian civilians largely pushed to the southern part of Gaza, they are now being ordered out by the Israeli Defense Forces in what many expect is the run-up to an invasion that will only take a deeper toll on civilians.
Israeli Prime Minister takes issue with credit downgrade
Israeli Prime Minister Benjamin Netanyahu downplayed the credit downgrade, saying in a statement: “The Israeli economy is strong. The rating downgrade is not connected to the economy, it is entirely due to the fact that we are in a war. The rating will go back up the moment we win the war — and we will win the war.”
After the October 7 Hamas attack, S&P Global Ratings reduced Israel’s credit outlook from stable to negative, while Fitch put the country on negative watch due to the risks associated with the conflict on October 17. S&P plans to update its rating for Israel on May 10.
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