Israel is Moody’s latest gaffe

Whether the protests against judicial reform succeed or fail, the financial services company will restore Israel’s positive rating.

A stock market ticker screen in the lobby of the Tel Aviv Stock Exchange, in the center of Tel Aviv, March 15, 2020. Photo by Flash90.
A stock market ticker screen in the lobby of the Tel Aviv Stock Exchange, in the center of Tel Aviv, March 15, 2020. Photo by Flash90.
Lawrence Solomon
Lawrence Solomon
Lawrence Solomon is a financial writer, a former contributor to The Wall Street Journal, a former oped editor of Toronto’s Financial Post and the author of seven books.

Until March 10 of this year, financial services company Moody’s gave the Silicon Valley Bank, a favorite of Israeli start-ups, an A1 rating. Then the Silicon Valley Bank collapsed.

Moody’s is also known for its role in the 2008 Great Recession, maintaining Lehman Brothers’ “A” rating and its promotion of sub-prime mortgages until the day before Lehman Brothers folded.

Moody’s shortcomings resulted in settlements of almost $1 billion with U.S. federal government authorities and the California public employees’ pension system alone. Enron and Pacific Gas & Electric’s bankruptcies are among Moody’s other high-profile failures.

Moody’s inability to distinguish between good credit risks and bad was on display again when it recently downgraded Israel’s credit rating, citing “a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary.”

Moody’s further cited “the manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus,” which “points to a weakening of institutional strength and policy predictability.” If the protests against the judicial overhaul succeed in quashing the proposed reforms or result in a compromise on the issue, Moody’s said it would restore Israel’s positive rating.

However, Moody’s did not analyze the substance of the proposed judicial reforms to determine if they meet Moody’s twin criteria of “institutional strength and policy predictability.” Had it done so, Moody’s would have realized that the proposed reforms pass both tests.

Israel’s judicial system is currently an outlier. No other democracy in the world has an unchecked supreme court that is accountable to nothing and to no one—not to democratically elected representatives, not to a constitution, not to limitations on its own powers such as the requirement that plaintiffs have standing.

By reining in the Israeli Supreme Court’s powers in conformity with democratic norms of co-equal branches of government, the proposed reforms would pass Moody’s first test of promoting “institutional strength.”

The reforms would also meet Moody’s second criteria—“policy predictability.” Israel’s Supreme Court does not believe foreign investors are entitled to predictability, as seen in its 2015 cancellation of a contract between the Israeli government and U.S.-based Noble Energy on developing natural gas resources off Israel’s coast.

To give Noble confidence that the terms of the contract would not change, the agreement guaranteed that Israeli governments would not adjust their regulations for at least 10 years. After the Supreme Court ruled those terms unreasonable, all potential investors knew that Israeli governments are helpless to protect their property rights from the whims of a Supreme Court that might arbitrarily upend any contract.

If the protests against judicial reform succeed, Moody’s will immediately reinstate Israel’s credit rating. If the protests fail and the reforms are adopted, Moody’s will reinstate Israel’s credit rating at a later date, once it becomes clear that the reforms aided Israel’s economy. Then, we will know that Moody’s has committed another gaffe.

Lawrence Solomon is a financial writer, a former contributor to The Wall Street Journal, a former oped editor of Toronto’s Financial Post and the author of seven books.

The opinions and facts presented in this article are those of the author, and neither JNS nor its partners assume any responsibility for them.
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