Until just a few days ago, Israel's credit rating had not been downgraded twice within a matter of weeks. At Standard & Poor's (S&P), the world's leading credit rating agency, there was concern about Israel's security situation and the significant expenditures it entailed.
However, there was confidence that an imminent end to the conflicts on the southern and northern borders would allow for renewed and proper control over the national budget, necessitating only a stern warning for Israel.
However, the decision to downgrade Israel occurred in two stages. At first, it followed an unprecedented attack by Iran last Saturday night. Once it became clear that the Israeli government intended to respond militarily to the Iranian attack, the downgrade of Israel's credit rating was inevitable.
The unusual late-night announcement at 2:00 AM Israel time caused consternation among the economic elite. The announcement was made two hours before the attack on Iran’s Isfahan and essentially served as a "preview" for Israel's imminent response on Iranian soil.
Now, the economists at the world's leading credit rating agency, which joined Moody's in downgrading Israel’s credit rating, are particularly concerned that the Israeli government will not be able to prevent a significant increase in defense spending, especially if the conflict between Israel and Iran intensifies in the coming weeks.
Iran has promised a response to the response, and it's unclear whether such a situation could escalate into a new type of regional war in the Middle East—not between a state and a terrorist organization, but between two of the world's largest and strongest armies.
A senior government official told Ynet Friday morning that the test for the Israeli government is clear. "Otherwise, our rating will drop further. The government must demonstrate absolute control over defense spending and prevent budget deficit leaks that would be very difficult to recover from," the official said.
A senior economic official expressed deep concerns over the lack of serious debate about defense expenditures and the fact that a special committee for this matter has not yet been established.
"If these enormous expenses spiral out of control, the Israeli economy could deteriorate to a state never seen even in previous wars, forcing citizens to endure significant cuts to services and painful tax hikes. Every citizen will pay for such a failure," the official said.
What happened Thursday night is a severe blow to the reputation of Israel's economy in the financial world. Vladimir Beliak, a member of the opposition in the Knesset's Finance Committee, claimed that "Israel's economy is already on the chopping block."
Let us challenge this assertion. Even after the downgrade, Israel's economy is still considered stable, as a country that has never missed any debt repayment. The Israeli market remains at an A-level rating by all three major agencies, with Moody's rating just one notch lower than the other two, but it has not yet fallen to a B-level.
However, after years of economic prosperity, Israel remains among the top 25 countries with the highest credit ratings worldwide. Investments in Israel, such as in companies like Intel, Teva and high-tech ventures, remain high and stable.
Recently, foreign companies, particularly in the food sector, have begun operations in Israel, with others still considering such opportunities for the near future. Declaring the demise of Israel’s economy following a downgrade would be a grave mistake.
However, the downgrade by two of the world's major rating agencies is not a trivial matter. The increased interest rates on loans for the Israeli government and Israeli companies will cost us billions of dollars. Israeli citizens will end up paying much more for the cost of war and other expenditures. Our standard of living is expected to decline in the coming years, and the quality of education, health and welfare services will decrease instead of improving, as our cost of living rises.
The credit rating is unlikely to improve in the next two years, contrary to the baseless assurances by Prime Minister Benjamin Netanyahu that the rating will return to its previous level "immediately after the war ends."
In the current Middle Eastern context and the outlook from all rating agencies marked as "negative," it indicates that the rating could deteriorate further soon. A positive outlook seems much further away than the physical distance between Iran and Israel.