Moody’s Agency downgraded the long and short-term deposit ratings of the top five major banks in Israel: Leumi, Hapoalim, Discount, Mizrahi Tefahot, and First International Bank of Israel to “A3/B2” from the previous level of “A2/B1,” with a negative outlook for the long-term deposit ratings.
The agency also lowered the long-term counterparty risk ratings of the five banks to “A2,” and the long-term counterparty risk assessments to “A2,” with a negative outlook.
Counterparty risk rating is a method of evaluating the probability of default quantitatively, based on data concerning financial position, business operations, and creditworthiness, where higher ratings indicate lower default risk.
At the same time, Moody’s confirmed the basic credit assessments of the five banks at “BAA2.”
The downgrade may extend beyond banks to include government-owned companies, such as the “Israel Electric Corporation.”
Reason for the downgrade
Moody’s attributed the downgrade to the reduced government support included in these ratings due to the downgrade of Israel’s rating.
The agency sees a very high likelihood of government support for the top five banks given their importance.
The negative outlook for the long-term deposit ratings reflects both the negative outlook for Israel’s government rating, increasing the risk of weakening the state’s ability to provide support, and the possibility of a much greater negative impact on the economy in the event of an escalation in the aftermath of the conflict in Gaza. This could have a more significant impact on the fundamentals of the banks independently than the current situation.
Moody’s added that the social risks facing the banks have increased due to the conflict and the weakened security situation.
The Israeli newspaper “Globes” quoted Motty Cirin, Deputy CEO of the Israeli credit rating agency (Midroog), as saying that the downgrade could extend beyond the banks to government-owned companies like the “Israel Electric Corporation.”
Moody’s credit ratings letters “A,” “B,” and “C” indicate long-term ratings, with Israeli banks referred to as “BAA2” indicating moderate risk.
As for the deposit ratings of the five banks at “B2” or “Prime-2,” this means they have a strong ability to repay deposits in the short term, but it is lower than “B1,” which signifies an extremely high repayment capability.
Moody’s downgraded Israel’s credit rating to “A2” with a negative outlook last Friday, citing the repercussions of the war with Hamas and its implications, as well as expected higher debt burdens in Israel compared to pre-Gaza war expectations.
It added that the risks of escalating conflict with Hezbollah remain, increasing the likelihood of a significant negative impact on the Israeli economy.
An article in Yediot Ahronot noted that the downgrade could lead to further downgrades if the security, geopolitical, and economic situation in Israel deteriorates.
The downgrade signifies that investors may become more cautious about Israeli debt instruments and may demand higher interest rates to address the risks outlined by the agency concerning the Israeli economy.
Moody’s announcement of Israel’s credit rating downgrade has caused a strong backlash in Israel, with this being the first downgrade since almost 50 years by Moody’s credit rating agency.
Bloomberg reported that Israel is facing anger due to its first credit rating downgrade by Moody’s in nearly 50 years.
Unnamed Israeli officials expressed concerns about the potential impact on Israel’s relationship with investors as it embarks on near-record borrowing to finance the war in Gaza.
The decision to downgrade Israel’s rating came amidst the war it launched on October 7, 2023, and its appearance before the International Court of Justice on charges of “genocide” alongside tensions in the north with Hezbollah and attacks in the southern Red Sea against Israeli, American, and British ships.
The downgrade means that investors may become more cautious about Israeli debt instruments and may demand higher interest rates to address the risks outlined by the agency regarding the Israeli economy.
Moody’s downgrade of Israel sparked an unusually harsh rebuke from Israeli officials towards the agency, including Prime Minister Benjamin Netanyahu, who questioned the motive behind the decision.
The dispute between Israel and Moody’s revolves around what officials believe is a misreading of an economy that has proven resilient in the face of wars and still enjoys significant foreign exchange buffers.
Israel’s foreign exchange reserves amount to about $200 billion, representing approximately 37% of the gross domestic product, a high value, but lacking other reserves such as gold and stocks.
According to Yediot Ahronot, senior officials at the Ministry of Finance are seeking to avoid further downgrades from the other major credit rating agencies, Standard & Poor’s and Fitch.
According to the newspaper, State Comptroller Yali Rotenberg scheduled meetings with senior officials of the two agencies in London this week to address their concerns.
