Moody’s Should Have Raised, Not Lowered, Israel’s Credit Rating
Its rationale for downgrading Israel could have been written by the U.S. State Department or “CNN” pundits.
By Lawrence Solomon | Jewish News Syndicate
Israel is arguably more secure now than at any time in its history. Hamas has largely been dismantled. Hezbollah has lost two-thirds of its short- and medium-range missiles and all of its senior leaders. And Iran has lost one-third of its advanced ballistic missiles in futile attempts to overwhelm Israel’s missile-defense system.
Moody’s reaction to Israel’s wartime success? It downgraded Israel’s credit rating to its lowest level ever—down two notches from A2 to Baa1—and warns of a third.
“Israel’s government has explicitly added the return of approximately 60,000 evacuees to the north to its war objectives,” Moody’s stated on Sept. 27, justifying its rationale for the downgrade on vague “geopolitical risks” instead of a no-nonsense bottom line. Yet the return of 60,000 Israelis to their homes and businesses would be a financial boon because they would be contributing to the economy while saving the Israeli government the cost of housing them elsewhere.
Moody’s failure to assess the boon of victory in the north was all the more perplexing since at the time it made its statement, Israel had taken out most of Hezbollah’s top leadership; its pager explosions had killed or incapacitated thousands of Hezbollah terrorists; and it had crippled Hezbollah’s communication system. As a result, Israel had eliminated the decades-long threat that Hezbollah would be able to unleash its arsenal of 150,000 missiles so as to overwhelm Israel’s defenses and destroy much of its infrastructure.
In a second failure of judgment, Moody’s assumed that Israel’s determination “to restore deterrence and get Hezbollah fighters to withdraw from the border area significantly increases the risk of a full-out war.” Yet the risk of a full-out war, which indeed existed before Israel so successfully degraded the Iranian proxies on its borders, had dramatically diminished by the time of the ratings downgrade.
In a third failure, Moody’s lamented that prospects for ceasefires have receded, not understanding that a ceasefire strategy would have kept Hamas and Hezbollah in power, burdening Israel with a continuation of its high military spending—two to three times as much per share of its gross domestic product as most Western countries. Without ceasefires, Israel may decisively defeat Iran and its proxies and end Iran’s destabilization of the Middle East, states Richard Dearlove, the former head of Britain’s MI6 spy agency.
Instead of being a hard-nosed, number-crunching, credit-rating agency that appreciated the overwhelming economic benefits that would follow the defeat of Israel’s enemies, Moody’s mused about harm to Israel’s geopolitical standing and stability—resembling more a political pundit with the same biases as the U.S State Department or CNN. This colossal failure of judgment regarding Israel reflects Moody’s history of failures elsewhere.
From 2000 to 2007 in the United States, Moody’s gave some 45,000 grossly overvalued mortgage-related securities its coveted AAA rating, contributing to the subprime mortgage crisis of 2007-08 and the global financial crisis that followed. In 2008, Moody’s maintained that Lehman Brothers was “investment grade” until the day before it declared bankruptcy. In 2001, it touted Enron as “investment grade” until four days before its bankruptcy.
Other blunders include Sino-Forest, a Toronto Stock Exchange-listed, China-based forestry company that Moody didn’t realize was worthless until its CEO resigned and the Ontario Securities Commission ordered a halt on trading its shares. And the largest municipal bond default in U.S. history when Moody’s failed to realize that the Washington State Public Power Supply System was so badly mismanaged that it would be unable to repay $2.25 billion in bonds.
More generally, Moody’s judged Israel’s credit-worthiness through the woke lens of ESG (Environmental, Social and Governance), citing tangential matters that concern the American left such as Israel’s judicial reform and the governance of Israeli institutions. Had Moody’s rated Israel’s credit-worthiness rather than its political correctness, it would have recognized that Israel has few peers in its ability to repay its foreign debts—the chief question that concerns Israel’s lenders.
To bolster its punditry with numbers, Moody’s stated that because of Israel’s wartime debt, “we now forecast the debt ratio to rise towards close to 70% of GDP.” Yet that debt ratio is superior to others. In the euro area, it stands at 88.7% of GDP, in Canada at 107% and in the United States at 120%. Moreover, the Bank of Israel’s foreign currency reserve, which is at an all-time high, is almost four times that of its external debt. Because Israel’s exports are in perennial demand, its current account surplus has exceeded 5% in the past 20 years.
Despite the burden of a war that is now costing Israel some $150 million a day, Moody’s expects Israel to achieve long-term 3% growth in its GDP, which it acknowledges “is still comparatively robust growth compared to many other advanced economies.” That statement, though positive, is nevertheless an understatement. In 2024, the International Monetary Fund expects Europe’s GDP to grow by a mere 1.6%, Canada’s by 1.3% and the United States’s by 2.8%.
Moody’s is correct that Israel faces great uncertainties in the future. That has always been the case, which partly explains why Israel’s past credit rating hasn’t been much higher. But those uncertainties are fewer in number and less worrying now that most of Israel’s enemies are on the run. In light of the war, Moody was right to review Israel’s credit rating. It was wrong to peg it lower, rather than higher.
For the original version of this commentary, see the publisher’s website here.
Image: Damage to a building in the northern Israeli city of Kiryat Shmona after months of rocket, missile and drone attacks by Hezbollah in Lebanon, July 24, 2022. Credit: Israeli Police.
Lawrence Solomon is a founding columnist of FP Comment. He is a current columnist for the National Post and Epoch Times, and a past columnist for the Globe and Mail. The Deniers, a #1 environmental bestseller on global warming, was deemed one of the “10 Books That Drive The Debate” by the U.S. National Chamber of Commerce. He can be reached at LS@lawrencesolomon.ca.