The massive credit downgrade by the major U.S. credit rating agencies is an unfortunate reminder of the international community’s tendency to discriminate against Israel. It also reflects the deep subjectivity of these rating agencies, which seems rooted more in agenda than in objective economic analysis.
Since the barbaric assault by Hamas in southern Israel on Oct. 7, 2023, all three major rating agencies have downgraded Israel’s credit rating at least twice. In addition to downgrades in late 2023, Israel fell from an A+ rating to an A on both S&P and Fitch’s ledgers in 2024. Moody’s knocked the country down another two notches from A2 to Baa1.
Of course, all three cited a gloomy fiscal outlook, driven by geopolitical risks, as the reason for the downgrade. It is true that Israel, like any country at war, has had to increase spending to fund its security operations. Its deficit grew in 2024 as Israel launched a large-scale operation to prevent future attacks from Hamas in Gaza, moved to neutralize threats from Hezbollah in Lebanon and sought to secure a buffer zone in Syria. It also grappled with direct attacks from Iran.
War is expensive and bad for business. It comes as no surprise that the Israeli government had to increase borrowing in response to the war. Nor is it a surprise that the greatest attack on the Israeli population in its history sharply disrupted the economy in the months that followed. However, the massive downgrade in its credit rating and long-term economic outlook should raise eyebrows, given the country’s rock-solid fundamentals.
Ostensibly, credit rating agencies assign creditworthiness scores without bias and based on hard economic performance. By that measure, Israel is currently the world’s most undervalued investment. Israel stands out among its new credit rating peers. The country enjoys a per capita GDP of more than $55,000, the second highest in the Middle East according to the International Monetary Fund, and one of the highest in the world. This is by far the largest figure among its current peers in all three major credit ratings, with the exception of Iceland. It defies economic reason to see these agencies claim that Israel is a comparable borrower to Kazakhstan, Peru, Thailand and Spain. These countries either carry significantly higher debt, have a much smaller economy or rely heavily on a single resource to sustain their growth.
To illustrate, Israel now shares a credit rating with Japan, whose GDP per capita is 40% lower than Israel’s and whose debt comprises 250% of GDP while Israel’s is just 67%. Additionally, Israel’s average growth over the past 10 years has been just under 4%, Japan’s was under 1%.
The Middle East is indeed a dangerous neighborhood. Israel’s conflicts with its neighbors have always imposed economic and security costs on it. What makes Israel unique in the region is the ability of its highly advanced, resilient economy to weather these storms.
Through decades of regional instability, Israel has remained an economic powerhouse and a bastion of internal security. Based on developments over the past few months, Israel has done it again.
Hamas’s military capability in Gaza has been effectively eliminated. The United States and France helped broker a ceasefire between a dominant Israel and a defanged Hezbollah, with conditions that will help ensure a safer future for Israelis. The Assad regime in Syria has finally fallen, removing a key antagonist from the Israeli equation. Iran’s currency and economy are in shambles, and its air defenses have been shattered.
Israel’s enemies are weaker than they’ve ever been, while Israel’s military and economy remain strong. Its deterrent power has been restored following the Oct. 7 security disaster. Importantly, it has achieved these victories while maintaining its most crucial defense partnership, which can strengthen under the Trump administration. It even continues to build relations with the Sunni Arab world.
Despite all these positive signs, rating agencies foretell economic doom and gloom for the country.
But what about the financial markets? Surely, the “market” agrees with the agencies. As it turns out, it does not. Financial markets have broadly rejected the “junk” narrative, particularly as Israel has gotten the upper hand in its security operations. In fact, by many metrics, Israel is more highly valued now than before Oct. 7.
Shortly after the terror attacks, the Israeli stock market understandably took a significant hit. Today, Israeli equities are floating near all-time highs, buoyed by an improving security outlook and the fact that Israel has one of the highest growth rates among developed nations.
Pessimists may say, “These agencies judge creditworthiness, not the stock market,” and they’d be right. However, debt and currency markets are telling the same story: Israel is back.
The Israeli shekel is now substantially stronger than it was at the start of 2023. The dollar-to-shekel exchange rate is substantially higher—doubly impressive since the dollar itself has gotten 8% stronger over the year.
As we search for some economic indicator to justify dismal assessments from these agencies, we turn to the Israeli yield curve, which these agencies apparently haven’t consulted in months.
In the last 16 months, Israeli government bond yields have understandably seen a rollercoaster ride. Just before the attack, the 10-year bond was roughly 4.4%. Yields gradually rose on fears of the country’s expanding military operations and the financial burden that came with it. The market required a higher return to justify the fiscal risks of the war, causing bond yields to peak at roughly 5% by mid-2024.
However, as those fears began to fade, the market adjusted. Ten-year bonds are now just below prewar levels. This reflects a broad sense of renewed confidence in Israel’s fiscal outlook. The market consensus is clear: Israel has returned to its prewar status as one of the world’s strongest and safest economies.
While the rating agencies continue to discriminate against Israel, investors are lining up to buy into the Israeli economy. Whether malice or incompetence explains this disparity, it’s time to get real.