Moody's credit rating agency Downgrades Israel's Top Banks Following State Credit Rating Drop

After downgrading Israel's credit rating for the first time ever, the rating company Moody's also downgraded the rating of the five largest banks. The rating of the major banks - Hapoalim, Leumi, Mizrahi Tefahot, Discount and International - dropped one grade from A2 to A3 and they were assigned a negative outlook, similar to the state's.
The downgrade of the banks is not surprising and was expected after the downgrade of the state. Moody's explains in its reasoning that the downgrade is related to the fear of the state's ability to support banks in a time of need, for the same reasons for which the state's rating was lowered.
Despite this, Moody's believes that there is a high chance that in times of need the government will support the bank groups due to their high importance and long-standing practice.
However, in the event of an escalation, there is a fear that "the damage to the banks will be more severe than we see today," according to Moody's, and the rating company also notes the increase in security and social risks which may also harm the banks." The company also notes the banks' investments in Real "N, an area that was hit hard by the war.
As a reminder, Israel's credit rating dropped for the first time last Friday. Moody's company, the first to publish the rating among the three companies involved in this, lowered Israel's rating to level A2 as well as the rating forecast to negative.
In the company's decision, it was stated that one of the main reasons for the downgrade is the assessment that the exposure of the State of Israel to political risks could, with a high probability, continue in the foreseeable future, even if there is a decrease in the intensity or a stop of the fighting in Gaza.
The company notes that although negotiations are currently underway for the release of the abductees in exchange for a temporary ceasefire and the introduction of additional humanitarian aid to Gaza, there is no clarity regarding the prospect, duration and ability to implement such an agreement.
The company further states that the fact that the US government and the countries of the region have presented general outlines of a long-term plan that includes the establishment of a new governance framework and political leadership in Gaza, may contribute to improving Israel's security. However, the Israeli government has so far rejected such plans. Moreover, If such a plan is ultimately concluded, its continued success over time, according to the company, will be questionable.
Therefore, the company estimates that the geopolitical risks, and in particular the security risk, will remain substantially high for Israel in the medium and long term. Also, the State of Israel may face a period of increased internal political upheaval when the War Cabinet is dissolved.

International credit rating agency Moody's has downgraded Israel's credit rating from A1 to A2, marking the first time such a downgrade has occurred in the country's history. This decision comes with a "negative outlook," indicating the potential for further deterioration if Israel's security, geopolitical, and economic situations worsen, particularly due to ongoing conflicts such as the war in Gaza or the possibility of opening another front in the north.

The downgrade reflects concerns over Israel's large budget deficit, which is projected to reach 6.6% this year, leading to an increase in the debt-to-GDP ratio from 59% to 68%. However, government officials, including the finance minister, have reassured that steps are being taken to stabilize the deficit in the coming years. Measures include raising VAT to 18% in January 2025, increasing the health tax, and considering additional tax hikes, such as a travel tax for electric vehicles and a congestion tax at entrances to Tel Aviv.

Moody's decision is expected to have significant repercussions, including an increase in interest rates on loans taken by the Israeli government and local companies. This rise in interest rates is likely to impact households as well. Furthermore, the Tel Aviv Stock Exchange may experience temporary price drops, and the shekel could weaken against foreign currencies in the near term.

Israel's average credit rating from the three major rating agencies had previously placed it around 20th in the world. Moody's now faces four options, ranging from maintaining the current rating with a warning about the future to the worst-case scenario of downgrading to A2 with a negative outlook, signaling the possibility of further downgrades in the future. The outcome of Moody's decision will be closely watched, as it could have lasting implications for Israel's economy and financial stability.

Just weeks ago, it was reported Moody's intentions to downgrade Israel's credit rating in light of the government's handling of a significant budget deficit. The looming threat of this downgrade has sparked frantic efforts from senior officials within the Prime Minister's office and the Treasury to persuade Moody's economists against such a move. Despite assurances from government figures regarding the stability of Israel's economy, concerns persist over the impact of a potential credit rating downgrade.

At present, Israel's credit rating stands at A1, a testament to its economic standing on the global stage. However, Moody's faces a decision with far-reaching implications: whether to maintain the current rating, issue a warning about future risks, lower the rating forecast, or deliver the feared downgrade to A2. Each option carries its own set of consequences, from increased borrowing costs for the Israeli government and companies to potential volatility in the stock market and currency exchange rates.

A senior Treasury official expressed serious concern over the possibility of a downgrade, citing the stability of Israel's economy despite ongoing conflicts in the region. However, the specter of prolonged warfare and regional instability looms large, potentially tipping the scales in Moody's decision-making process.

As the clock ticks closer to midnight, the eyes of the financial world remain fixed on Moody's impending announcement, with the fate of Israel's credit rating hanging in the balance.