There was an article in The Straits Times on 21 October about how Moody’s is reviewing the Israeli government’s credit ratings, possibly for a downgrade. Israel and Hamas are currently engaged in a conflict.
Before we go into further details, let’s answer the question of what is Moody’s, and what are credit ratings?
- Moody’s is a ratings agency which gives a score to how reliable a borrower is; in other words, how likely a borrower will repay its debts.
- The scores rating agencies assign are known as credit ratings.
This move by Moody’s is not surprising, since when a country is involved in war and conflict, more of their resources will be diverted to the war effort, affecting their ability to repay any debts on time.
In a statement, Moody’s said: “Israel’s credit profile has proven resilient to terrorist attacks and military conflict in the past. However, the severity of the current military conflict raises the possibility of longer-lasting and material credit impact.”
Another ratings agency, Fitch, is also reviewing their credit rating of the Israeli government.
So that’s the current situation with regards to the main ratings agencies and the Israeli government. What do we think is going to happen down the road?
During a conflict, a government is going to need as much resources as possible at its disposal, so its probably going to have to borrow heavily. However, its downgrade means that lenders will view lending money to the government as being riskier, which means that investors will want to be compensated for the additional risk by imposing higher interest rates. This will create increased strain on Israel’s finances, as not only will they have to borrow more, but they will have to pay more to borrow.