As the legal revolution in Israel approaches (in one format or another), it is important to learn a little from the experiences of others. It is not yet clear what compromise will be reached in the end, if any.
Two countries, Poland and Hungary, followed a similar path (but there is no complete similarity, of course). What were the consequences for the exchange rate and in general?
Poland
In 2016, the “Law and Justice (PiS)” party came to power in Poland. Supreme Court.
In January 2016, P&S unexpectedly lowered Poland’s credit rating to BBB + with a negative outlook from A – with a positive outlook. The rating company noted that the new government weakened the independence of central institutions, and the credit rating could drop further. “The downgrade reflects our opinion that the system of institutional checks and balances in Poland has significantly eroded.”
The Polish zloty responded by depreciating by 5% in one month against the euro. Today Poland suffers from 16% inflation with an interest rate of 7%. The yield gap in 10-year bonds with Germany rose from 1.7% to 3.8% today.
Hungary
Viktor Orban, the prime minister in office since 2010, began a series of legal and constitutional changes concerning the election system that harm the independence of the courts and their ability to monitor the actions of the government and parliament. Along with the damage to the judicial system, attempts were made to harm the independence of the central bank, but the Council of the European Union promoted moves against this attempt and stopped it in the end.
In January 2012, Feitz lowered Hungary’s rating from A – with a positive outlook to BB + with a negative outlook (two notches). This is after downgrading the other two rating companies. The drop in the credit rating in these countries was also accompanied by a sharp drop in foreign investments. Against the backdrop of the downgrade, the Hungarian florin decreases by almost 7% at the beginning of 2012. Today, inflation in Hungary stands at 26% and the basic interest rate at 13%. The 10-year bond yield gap with Germany rose from 2.5% to 6% today. It is clear that there were other factors that contributed to the deterioration of the economic situation, such as an irresponsible fiscal policy and an attempt to undermine the independence of the central bank.
Regarding Hungary and Poland, it is important to emphasize that the European Union, the supreme system to which they belong, guarantees the preservation of a certain level of democracy and the independence of the various institutions in the countries (which does not exist in Israel). As mentioned, the intervention of the European Union led to a change in the government’s moves in Hungary and the neglect of some of the anti-democratic moves in Poland. Despite this, the credit rating was also lowered in Hungary after the start of measures to harm the judicial system, and in Poland it was not raised, despite the relatively good economic performance.
Several rating companies have already warned about the possible damage to the legal authorities in Israel. In the coming weeks we will probably know which “reform” will be implemented. The Hungarian and Polish experience shows that the reaction of the rating companies was very quick and even surprised the markets with its strength. The local currency reacted accordingly and over the years the yield gap against the German benchmark widened, this despite the fact that in those countries, the European Union institutions acted to limit the moves (in particular the attempt to damage the independence of the central bank) with a threat to delay some of the supports and investments. The threat of continued pressure to depreciate the shekel on the inflation environment seems certainly tangible.
**The author is the chief economist of the investment house Leader Shuk Houn**