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(Bloomberg) -- Israel is in a pique over its first-ever rating downgrade that’s so far left markets unmoved but led to worry the government’s standing with investors could suffer as it embarks on near-record borrowing to fund the war.
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The announcement last week by Moody’s Investors Service already prompted an unusually strong rebuke from officials including Prime Minister Benjamin Netanyahu, who called into question the politics behind the decision. A top technocrat at the Finance Ministry’s office known as the “government’s CFO” has now added a voice to the debate by marshaling figures he argues are at odds with the rating company’s rationale for its one-notch cut to A2.
“We have a lot of appreciation for Moody’s, but their decision is not consistent with macroeconomic and fiscal data,” said Yali Rothenberg, the Finance Ministry’s accountant general who’s in charge of managing Israel’s $300 billion debt stock.
The outcry contrasts with what’s so far been a muted reaction in markets, with Israel’s shekel the best performer against the dollar after the downgrade among a basket of 31 major currencies tracked by Bloomberg.
Israel’s bond prices were little changed and the cost of insuring the government’s debt against default — a key gauge of country risk — fell the most since November on Monday.
Rothenberg said the Finance Ministry’s bond auctions on Monday drew record demand from local investors and the rate of interest returned to pre-war levels, which he described as a sign of market confidence after the downgrade.
“Even if Moody’s decision is professional, it incorporates geopolitical elements that, in our opinion, had been given way too much weight,” he said on a call with reporters.
While Israel is still well within investment-grade territory, the stakes remain high because it risks further downgrades after the other two major credit assessors also lowered its outlook to negative in the weeks after the war began in October. At the time, a cut to its sovereign rating seemed like an extreme scenario unless the conflict dragged on for an extended period.
Fitch Ratings now ranks the country one notch above the level it has at Moody’s. S&P Global Ratings puts Israel a step above Fitch’s assessment.
Israel’s disagreement with Moody’s centers on what officials believe is a misreading of an economy that’s proven to be resilient to wars and still boasts large foreign-exchange buffers with access to capital markets at home and abroad. Rothenberg said authorities made a case to Moody’s objecting against its decision but to no avail.
In the appeal, Israel argued the war’s impact on its macroeconomic and fiscal indicators was not “inconsistent with its historical experience in previous conflicts,” Rothenberg said.
Moody’s didn’t immediately respond to a request for comment.
In a statement accompanying the downgrade, the rating company pointed both to the war’s immediate impact on the country’s finances and the risks it carries “for the foreseeable future.” The threat of a wider conflict was a factor in changing Israel’s outlook to negative, according to Moody’s.
“The ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength,” it said. “The consequences of the conflict in Gaza for Israel’s credit profile will unfold over a long period of time.”
The assessment almost immediately raised the rankles of Israel’s officialdom, with Netanyahu issuing a rare statement over the Jewish Sabbath. Finance Minister Bezalel Smotrich, a nationalist leader and a lifelong West Bank settler, called the assessment “a political manifesto.”
For Rothenberg, Moody’s overlooked a government debt ratio that remains low by historical and international standards despite being on track to increase to 67% of gross domestic product in 2024. He also questioned the rating company’s view of the risks that the conflict could spread to Israel’s northern border.
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“We do not completely know what they are relying on,” he said. “We believe that too much weight is given to theoretical scenarios with no certainty about their realization.”
Rothenberg acknowledged Moody’s concerns over a dramatic increase in Israel’s expenditure on defense, which the rating company expects will reach almost double the level of 2022 by the end of 2024 and then grow by at least 0.5% of GDP in each of the coming years.
The strain on public finances means the government should stick with the goals outlined in its revised budget, which is pending final approval in parliament later this month.
“The long-term price tag of the defense budget should be clear and correspond to Israel’s economic capabilities,” Rothenberg said. “We must project credibility to markets through the implementation of the government’s decisions on increasing revenues and decreasing expenses.”
(Updates currency performance in fourth paragraph.)
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