For the first time in its history, the State of Israel has seen its credit rating downgraded, as Moody's on Friday took the country's rating down one notch to A2, and said the rating outlook going forward is negative.
The country's ongoing war with Hamas and occupation of Gaza will “materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future,” said Moody's, which added that the conflict will create deficits over upcoming years that “will be significantly larger than expected before the conflict.”
The war, now in its fifth month, began on Oct. 7, when Hamas militants shocked Israel with an invasion from Gaza in which military raids and terrorist acts took the lives of 1,139 people, including 695 civilians. The death toll from the Israel Defense Force's retaliation is now reportedly approaching 28,000.
There's no end in sight. Indeed, Israel is on the threshold of a new phase that promises to be militarily and economically costly while further isolating the country politically: Having herded Palestinian civilians from northern Gaza into the southern part of the strip, the IDF now plans to order them out of the southernmost city of Rafah, as a precursor to an invasion. The move promises to compound the ongoing humanitarian disaster.
Israeli Prime Minister Benjamin Netanyahu responded to Moody's announcement with a rare statement issued on Shabbat, the Jewish day of rest, in which he was dismissive of the historic downgrade:
“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."
The Moody's credit downgrade comes on the heels of a failed attempt by House Speaker Mike Johnson to advance a stand-alone aid package that would have shipped off another $17.6 billion in American wealth to Israel. In a sign of growing exasperation with the relentless funding of foreign wars while the national debt races above $34 trillion, 14 Republicans voted against the proposal.
One of them, Rep. Thomas Massie of Kentucky, ridiculed the idea of sending money to a government that, by some measures, is in better financial shape than America's. "Israel has a lower debt to GDP ratio than the United States," Massie said on Twitter. "This spending package has no offsets, so it will increase our debt by $14.3 billion plus interest. I’m a No."
Israel now shares the same debt rating as Poland and Chile. However, the credit markets are imposing a lower de facto rating on Israeli debt: Bloomberg notes that 5-year credit default swaps (CDS) insuring against Israeli default cost more than the same protection against Indonesian or Mexican default.
The Israeli Knesset is currently working on its 2024 budget. A current proposal imposes a 3% across-the-board spending cut on almost all government agencies, as it targets a deficit equal to 6.6% of GDP.
In the wake of the Oct. 7 attack, S&P and Fitch both switched their outlook on Israeli debt to negative. S&P has said it will update its rating on May 10.