What is a credit rating of countries anyway?
A credit rating is a score that a country receives, which represents the likelihood that that country will pay back its debts. The higher the score, the greater the likelihood that the state will pay its debts, therefore the supply of loans available to it will be higher and the interest it will pay on its loans will be lower.
Who gives the grade and on what basis?
The grade is given by international credit rating agencies, which employ economists and analysts whose job it is to examine, through various parameters, the economic strength of that country, such as debt levels, repayment of previous debts, and maintaining a budgetary framework. Alongside this, other elements such as political stability and the level of functioning and independence of the various state institutions are also influential. These are measured, among other things, by the independence of the judicial system and its ability to protect property rights, enforce legal agreements and generally prevent the government from acting without restrictions.
The main rating agencies are S&P (Standard and Force), Moody’s and Fitch, and they examine and publish the countries’ scores every year. S&P was the first to rate Israel in 1988, when the other two joined in 1995.
1 Viewing the gallery
Finance Minister Bezalel Smotrich and Prime Minister Benjamin Netanyahu
(Photo: EPA/RONEN ZVULUN / POOL)
And what about all the letters?
The credit ratings vary slightly between the different rating agencies, but the principle is the same in all of them: the highest score is AAA, and then the score decreases as there are fewer letters and as their order in the English alphabet increases: for example, AA is higher than A, and A is higher than BBB which is higher than BB. Some agencies add plus or minus to the rating, so AA plus is higher than AA which is higher than AA minus. In addition, the companies also provide a forecast that can be “stable”, “positive” or “negative”, thereby signaling trends and predicting a future change in the rating. While Israel’s credit rating has never decreased since it was first given in 1988, the forecast for the rating has changed many times over the years depending on the security situation, economic crises, etc.
What is Israel’s score and are we in good company?
The grade depends on the grading agency. In S&P, it has stood at AA minus since 2017. Although this is not the highest score that can be received, it is still a high score which, according to S&P, means “a very high ability to meet financial obligations”, and is given to developed countries with a relatively strong economy such as the Czech Republic, Ireland, Slovenia and Estonia. Israel has never failed to pay its debts, and since its first rating in 1988, which was BBB minus, and despite changing geopolitical conditions, the upward trend in its rating has continued.
So why is the credit rating so important?
At the most basic level, a high credit rating allows Israel to borrow money at a relatively low interest rate. Since, like any functioning country, a significant part of Israel’s current budget is based on debt, the interest rate is very significant: the total debt of the Israeli government is more than one trillion shekels, while every year the state pays tens of billions of shekels in interest. The debt allows the state to bring about future growth, for example by investing in infrastructure, which will help increase the future product and the well-being of the residents. A drop in the credit rating could significantly increase the interest rate that Israel will pay.
The credit rating represents not only the payment ethics of the country but also the strength of the business environment. If it will be more expensive for companies to borrow money, this will be reflected in the prices of their products and more fuel will be poured into the fire
How does the increase in loan prices affect me?
A country’s credit rating and interest payments sound like concepts that are far from our daily lives, but in fact they have a direct consequence: if it becomes more expensive for the government to borrow money, this means that the government will be forced to devote more and more money from its budget to repaying debts instead of investing it in social services, or raising taxes That is, the standard of living of the average citizen will decrease, or at the very least will not improve as much as it would have improved had Israel’s rating remained unchanged. In addition, the credit rating does not only affect the level of debt but also on foreign investments in the country and on financial entities that raise capital such as banks. The reason for this is that the credit rating represents not only the payment ethics of the country but also the soundness of the business environment. If it becomes more expensive for companies to borrow money, this will translate into the prices of their products so that more oil will be poured into the fire of prices that are still burning, and they will continue to rise. In more serious scenarios, workers will be forced to be laid off, and some will choose to leave the country. Rising prices and rising unemployment are both relevant to every average citizen. Worse than that, beyond the impact of the credit rating on our lives in the present, the rating will affect the future debts that Israel will raise, thus affecting future generations who will have to deal with higher levels of debt that will harm their standard of living.
Are there examples in other countries?
The letter from the economists mentions the downgrading of Poland’s credit rating by S&P in 2016 following a violation of the independence of the Constitutional Court and public broadcasting. The Israel Democracy Institute published a study in which former governor Karnit Flug participated in writing, and which examined the credit rating and the scope of foreign investments in countries where damage to the justice system occurred such as Poland, Turkey and Hungary.
The study directly links damage to the legal system to a decrease in foreign investments and a danger to the credit rating. In the context of Poland, the study notes that although after the reform in 2016 the credit rating returned to its previous level, “it is likely that the fact that Poland’s credit rating has not increased in the last six years, despite the relatively strong growth in the country, and in contrast to the credit rating increases during that period in countries such as Israel, Slovenia and the Czech Republic…is related to the deterioration of Poland’s legal system.”
The institute also notes that in the case of Poland joining the European Union constitutes a kind of protection since it guarantees “maintaining a certain level of democracy and the independence of the various institutions in the country”. Israel is not subject to agreements and frameworks like the states of the Union, and unlike them, it operates from the beginning in a tense and complex geopolitical environment, and therefore it is likely that the damage to it will be more significant than the one that occurred in Poland. Governor Amir Yaron even stated in the finance committee discussion on the legal reform that “Many studies have shown that strong and independent institutions are an essential element for the existence of a developed and prosperous economy. Accordingly, the credit rating companies are also examining these areas. Therefore, it is important to ensure that these characteristics continue to be maintained in any process that is promoted.” .
At the moment Israel’s rating forecast by S&P and Fitch is stable, so before they choose to lower the credit rating, they will update the forecast. At Moody’s, the forecast is currently positive. Another possibility they face is to put Israel under surveillance – Credit Watch. That is, the process of downgrading a credit rating, if it happens, will not happen in one day but in a continuous process that is expected to take more than a year. However, the early statements of S&P can already be seen as the beginning of the process, as far as the reform of the judicial system is realized.