The credit rating company Moody’s on Tuesday issued an extremely unusual warning: “Government of Israel: Planned judicial changes could weaken Israel’s institutional strength.”
Moody’s move is extremely rare and represents a reading of the judicial reform that’s gleaned from the most biased, left-leaning media in Israel, or, in other words, the vast majority of the country’s mainstream media.
On March 1, the Hong Kong Fitch Ratings company affirmed Israel’s Long-Term Foreign-Currency Issuer Default Rating at ‘A+’ with a Stable Outlook. Moody’s has also rated Israel A+ with a positive outlook––and that last part about a positive outlook means Moody’s plans to raise Israel’s credit rating.
The credit rating represents the company’s evaluation of the credit risk of giving a loan to Israel, which predicts its ability to pay back the debt, and the likelihood of the country defaulting on it.
Israel has one of the very best debt-to-GDP ratios in the OECD – 59.2% in 2022, compared with Japan which has a 164 ratio, Singapore at 126, the US at 110, and the UK at 90. Israel’s rate of growth last year reached 6.5%, among the highest in the world. Its unemployment is among the lowest in the world, and it is sitting on $202 billion in reserves.
According to Moody’s warning (ransom note?), the Netanyahu government’s judicial reforms represent significant changes to the legal system in Israel, and the extent of the changes and the speed with which the government is trying to promote them through legislation has led to widespread criticism in Israel and the international community. They have led to widespread protests since January.
You get it, right? Unlike Fitch, which noted no problem regarding the risk level involved in lending to the Israeli government based on the numbers, Moody’s is issuing a warning based on editorials in Haaretz and demonstrators blocking the Ayalon highway.
And Moody’s adds, in a learned tone, that in its opinion, if fully implemented, the changes could substantially weaken the power of the judicial system and thus negatively affect Israel’s credit rating. In other words, the proposed changes will pose long-term risks to Israel’s economy, in particular to capital flows to the high-tech sector.
Moody’s main objection focuses on the override clause that allows a Knesset special majority of 61 to bypass a supreme court annulment of a law or revoking of government action. Some in Israel believe that the override––which also requires a special court majority to annul or revoke––was a “goat,” meaning a bargaining chip Levin added to his package with the intent of getting rid of it as a gesture of goodwill.
There’s no reference in Moody’s warning to the fact that the courts in Israel have been deterring foreign businesses from investing in Israel. On Tuesday I quoted Shmuel Slavin, a former Director-General of the Finance Ministry, who said: “I talk to lawyers who complain that since Aharon Barak’s Apropim ruling was accepted (a ruling that states the judge must investigate the presumed intent of the parties to a contract, without being limited to its language) they have been losing clients. They tell me, we sit on drafting a contract for dozens of hours at a cost of a lot of money, to be as precise as possible, and then Aharon Barak arrives and with one strike of his pen dismisses what’s written in the contract, and decides what’s important is the intent of the author.
“It’s no wonder most foreign companies insist that if the business goes to trial, it would be in their country and not in Israel. In London, what’s written in a contract is what is,” he says, adding: “The procrastination here in Israel is also difficult since the judges write poetry instead of judgments.”
Is Moody’s very unusual warning unethical? Is it serving the economic needs of its clients? Good question. The credit rating company has certainly thrown its full gorilla weight into the ring on the side of the Israeli left. With that it certainly created a powerful self-fulfilling prophecy: by saying investments in Israel’s hi-tech will dwindle as a result of the reform, it causes investments in Israel’s hi-tech market to fall.
Moody’s rating records in the past two decades have been more likely to reflect political changes than the other rating companies. Its evaluation of the Hong Kong debt risk has fluctuated and reflected the clashes between pro-democracy demonstrators and the Chinese government, more so than Fitch or S&P.
It should be noted that while warnings––even exceptionally biased as this one––are usually issued overnight by the company’s research team, while a decision to change a country’s credit rating involves a much more involved and certainly longer process.