Israel hits back at Moody’s downgrade over Gaza war impact

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Israeli leaders have hit back at a credit rating downgrade from Moody’s, the first in the country’s history according to a finance ministry official, with Prime Minister Benjamin Netanyahu arguing it was a result of the war rather than the underlying economy.

Moody’s, the rating agency, lowered Israel’s sovereign rating from A1 to A2 over concerns about the war against Hamas militants in Gaza, its indefinite duration and the broader impact on the country’s economy. The agency also lowered Israel’s debt outlook to negative due to the risk of the conflict spreading to Israel’s northern front with the Lebanon-based Hizbollah militant group.

“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 said in a statement on Friday, highlighting Israel’s “deteriorating” public finances because of vastly increased defence spending.

Responding to the report, Bank of Israel governor Amir Yaron on Sunday defended Israel’s “strong” macroeconomic and monetary policy and the economy’s “rapid recovery from the initial shock of the war,” including in the financial markets.

Netanyahu, in a rare statement over the Jewish Sabbath, said: “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.”

Bezalel Smotrich, the ultranationalist finance minister, said it did “not include serious economic arguments and is entirely a political manifesto based on a pessimistic and unfounded geopolitical worldview” that reflected a lack of confidence in Israel’s strength and “apparently also a lack of confidence in the righteousness of its path in the face of its enemies”.

Smotrich also slammed Moody’s for not defining Hamas and Hizbollah as “terrorist organisations” in its report, and claimed that the downgrade would not have occurred if Israel had accepted international demands — which he termed a “suicide plan” — to stop the war and establish a Palestinian state in Gaza and the West Bank.

“We do not derive our national, security, social and economic strength from how we are judged in the world, but from a deep faith in the rightness of [our] way,” Smotrich added in a statement on Saturday.

Israel launched its offensive in Gaza after Hamas fighters stormed into Israel on October 7, killing 1,200 people and taking another 250 hostage, according to Israeli officials. Israeli air and ground attacks since have killed more than 28,000 Palestinians, including thousands of children, health authorities in the Hamas-controlled territory said.

Negotiations between Hamas and Israel — brokered by Qatar, Egypt and the US — are continuing over a possible ceasefire that could see the remaining hostages released and more aid flow into Gaza for desperate civilians.

Yaron said that even according to the rating agency assessments, Israel’s debt-to-GDP ratio should peak at 67 per cent, which based on Israel’s past experience with geopolitical crises during periods of higher government debt should not lead to any delay in repayments.

Yet he also urged the Israeli government to take the appropriate measures, including passage of a 2024 budget, to soothe the concerns of global markets.

“The Israeli economy is rooted on strong and healthy economic fundamentals,” Yaron concluded. “We have known how to recover from difficult periods in the past and rapidly return to prosperity.”