How could a credit rating downgrade impact Israeli wallets, markets?


The impact of a country’s credit rating downgrade on citizens’ wallets begins even before the actual downgrade occurs. Markets, in practice, do not wait for the official downgrade announcement and already demand higher interest rates. This translates to tangible consequences for citizens who are faced with increased borrowing costs and reduced access to affordable loans.

As the deputy director of marketing and sales at Ayalon Trust Funds astutely pointed out, “The markets are already pricing in the interest rate reduction and the risk premium of the State of Israel as a traded credit rating lower.”

This preemptive market reaction means that the damages are already taking place, well before the official rating is published.

In fact, the current market conditions have prompted lenders to demand higher interest rates even before any downgrade is made public. The anticipation of a lower credit rating has led to the immediate effect of increased borrowing costs for individuals and businesses alike.

This ripple effect can be felt in various sectors of the economy, impacting everything from mortgage rates to business loans.

Eyal Haim, VP of Marketing and Sales at Ayalon Mutual Funds (credit: Ayalon Mutual Funds)

Adjusting expectations for a lower Israeli credit rating

Additionally, market participants are adjusting their expectations and pricing in the reduced creditworthiness of the State of Israel. The market has already factored in the potential decrease in interest rates and the risk premium associated with a lower credit rating. This, in turn, translates into higher borrowing costs for the government and reduced resources available for essential services and investments.

Closed shops in Kiryat Shmona. The state may cut benefits for businesses in the periphery (credit: REUVEN CASTRO)

It is important to highlight that the actual damages are not simply waiting for the official credit rating downgrade. The repercussions are already being felt in the form of increased interest rates and the subsequent strain on citizens’ wallets. Hence, the significance of the event lies not only in its direct financial implications but also in raising awareness and understanding of its far-reaching consequences.

As Moody’s, one of the leading credit rating agencies, prepares to release its assessment in the coming days, it becomes crucial to closely monitor the potential outcomes and actions that will be taken to address the economic challenges Israel currently faces. The decisions made by rating agencies will undoubtedly have a lasting impact on the financial landscape, the government’s fiscal policies, and the overall well-being of Israeli citizens.