The Israeli economic newspaper Globes expected that Moody’s downgrading of Israel’s credit rating would have a negative impact on the lives of Israelis, noting that the cost of debt would be higher, which would lead to raising taxes to finance the government.
Inflation will likely fall slowly, and the bond market will respond, hurting everyone’s retirement savings.
Moody’s lowered the Israeli sovereign rating to “Baa1” twice, and added a negative outlook to it, against the backdrop of the war on Gaza and its expansion into new fronts, which means that the rating is likely to be lowered again during the next 18 months to two years. According to the newspaper.
Real-time effects
The newspaper reported that among the immediate effects of downgrading the rating is a decline in Israel’s ability to repay its debts, which means a higher cost for collecting new debts, with lenders demanding higher interest to compensate for the higher risks.
But the newspaper pointed out that the risk premium borne by Israel (the difference between interest rates on Israeli government bonds and 10-year US Treasury bonds) is close to the BBB rating level, which is a lower credit rating level than that recently approved.
It quoted the chief economist at the Israeli consulting firm BDO, Chen Herzog, as saying that lowering the rating creates a domino effect (the damage gradually widens), “Interest rates on government debt rise due to the lower rating, which leads to an inflation of the fiscal deficit. “High government spending on servicing its debt makes it necessary to raise taxes and cut spending, which exacerbates the economic slowdown.”
This is what the Israelis bear
The newspaper reported that due to the damage to the economy, it is likely that:
- Israelis’ savings are being harmed
- The low rating may negatively affect the performance of pension funds and advanced training funds.
Herzog confirms that the consequences of downgrading the rating:
- It will reach Israelis’ pockets due to “higher taxes, higher prices, and wage erosion, as well as the damage to savings and pensions resulting from the impact of the economic slowdown and increased interest rates on the markets.”
- Interest rates on corporate debt will rise, as well, due to higher perceived risks, which will cause prices and the inflation rate – currently at 3.6% – to increase significantly until the second quarter of next year.
Downgrading banks’ ratings
By lowering Israel’s sovereign rating this year, some rating agencies also lowered the ratings of Israeli banks, as they are considered entities supported by the state in crises, and thus this support will decline as the risks to the state increase.
Following the downgrade of Israel’s credit rating, Moody’s also downgraded the ratings of 5 major banks in Israel: Leumi, Hapoalim, Mizrahi Tefahot, Discount, and First International.
The newspaper quoted the joint CEO of Oppenheimer and its partners in Israel, Harel Gilon, as saying, “The credit rating downgrade will have an immediate impact on the financial markets… Banks are in fact derivative of the state, and we will now see debt collection costs rise accordingly.”
He added: “The banks’ review shows that the vast majority of their profits come from the Israeli economy, and therefore if there is no change in the local economy, I do not see a significant change in their profits as a result of the credit rating downgrade.”
