How war has hurt Israel's financial strength
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War is expensive — and, for Israel, the multibillion-dollar bill is coming due.
Why it matters: Israel's financial strength has long been a matter of national pride. Now, its need to fund the war in Gaza has resulted in the country's first-ever credit downgrade.
The big picture: Given the cost of the war in Gaza, Israel will need to borrow about $58 billion this year, per Bloomberg — about $23,000 per household.
- That's over three times the size of the budget deficit in 2022.
Driving the news: Moody's on Friday downgraded Israel's credit rating by a single notch, from A1 to A2.
- Moody's cited not only the country's deteriorating finances but also said that the conflict would "weaken its executive and legislative institutions."
Where it stands: The move from Moody's was expected by the markets — the agency has had the country under review for a possible downgrade since October. What might not have been expected was the reaction to the downgrade from the Israeli government.
- Israel's finance minister, Bezalel Smotrich, said the downgrade was "not based on serious economic arguments and is entirely a political manifesto," adding that it was grounded in "a lack of confidence in the righteousness" of the war.
- Prime Minister Benjamin Netanyahu was slightly more measured, but still released a statement saying that "the rating downgrade is not connected to the economy."
Between the lines: Israel's public finances have now taken on an unavoidably religious dimension.
- Smotrich said upon taking office that his economic strategy would be "infused with religious beliefs laid out in the Torah," per Reuters. In an interview with an ultra-Orthodox magazine, Mishpacha, he suggested that following Jewish scripture was an alternative to both socialism and capitalism.
- On X, Netanyahu biographer Anshel Pfeffer said Moody's downgrade was "an indictment of Finance Minister Smotrich's God-fearing economic policy."
What's next: Israel is highly attuned to where its dollar-denominated bonds are trading on international markets, and the message the bond price sends about its economic health.
- As a result, it's likely to fund most of its 2024 budget deficit domestically and will borrow in dollars only via secret private placements, per Bloomberg.
- Those borrowings are generally more expensive than a bond issue but have the advantage of not carrying any kind of public interest rate.
- That could end up saving money for Israeli companies whose cost of borrowing is benchmarked to the country's public bonds.
By the numbers: Israel's dollar-denominated bonds were largely unchanged on Monday following the downgrade — a sign that the Israeli finance ministry had done a good job of ensuring it was already priced in.
The bottom line: Israel is going to pay a premium to finance this war — but it can afford to do so.
