Moody’s says the main factor in downgrade decision was threat to Israel’s judiciary

Moody’s Investors Service says that the key factor that drove its decision to lower Israel’s credit outlook was concern that the planned changes to the country’s legal system would threaten the independence of the judiciary.

The statement appears to contradict claims by government figures that the move was driven more by the major protest movement against the overhaul than by the legislation itself.

Speaking at a webinar, Moody’s senior vice president Kathrin Muehlbronner says that the credit rating agency assesses fiscal policy based on monetary and macroeconomic policy effectiveness.

“The only driver for our rating action last Friday were the events around the government’s plans for judicial changes,” says Muehlbronner. “With Israel, our main concern is the executive pushing through important changes to the institutional setup of the country at such a speed and without any dialogue really — for us it is not a sign of strong institutions.”

Muehlbronner says: “The plans risk undermining the independence of the judiciary, because the government would have control of the appointment of judges — in particular, the appointment of Supreme Court judges — and it would also limit the ability of the Supreme Court to review legislation and decide on the legality of laws.”

“Having a strong and independent judiciary is important everywhere, but even more so in a system like Israel where there are really only two branches of government, the executive and the judiciary. Other checks and balances that exist in other countries are relatively weak in Israel,” she adds.

On Friday, Moody’s lowered the country’s economic outlook from positive to stable, citing a “deterioration of Israel’s governance” and criticizing the “manner in which the government has attempted to implement a wide-ranging [judicial] reform without seeking broad consensus.” This, the agency warned, “points to a weakening of institutional strength and policy predictability.”

Moody’s reaffirmed Israel’s A1 credit rating backed by “strong economic growth and improving fiscal strength,” while warning that the rating “would come under downward pressure if the current tensions were to turn into a prolonged political and social crisis with material negative impact on the economy, possibly linked to substantially lower capital inflows into the important high-tech sector and relocation of Israeli firms abroad.”