Bulletins and News Discussion from February 12th to February 18th, 2024 - The Prodigal Failson - COTW: Brazil

Moody’s Just Told You So — Downgrades Israel, Warns That Weaker US Backing for Israel, War With Hezbollah Would Trigger Crash

By John Helmer, hosted at Naked Capitalism. Yves has a foreword:

Yves here. Helmer continues his discussion of the high and rising cost of the war in Gaza on Israel’s economy. Helmer was early to point out that Israel’s economy can’t endure a long war, even with US economic support. Too many important sectors are taking hits with no prospect of recovery under conflict conditions, and uncertainty when and if they could get back to their old level in the unlikely event that Israel backed down. Note that the ratings agencies are more timid about downgrades than Helmer indicates. For corporate issuers, the norm is to downgrade only when the bonds are already trading at a lower ratings level, as in to validate Mr. Market. Similarly, in the subprime mortgage securitization era, the agencies were extremely slow to downgrade, there out of reluctance to admit how poor their ratings practices had been. Mind you, that does not diminish the fact that presumed-late downgrades of Israel were pushed back a tad more by Israel and US temper tantrums.

Twice already the warning of the obvious has been posted in the money markets — Israel cannot survive a long war with the Arabs and Iran. In this long war, the gods do not favour the Chosen People, it was reported on October 27, three weeks after the Hamas offensive began. The decline in Israel’s export earnings from tourism and diamonds; the loss of imported supplies for manufacturing and consumption from the Houthi blockade of the Red Sea; and increasing risk to both imports and exports at the Mediterranean ports within range of Hamas and Hezbollah strikes were identified at that time. The international ratings agencies, Moody’s, Fitch and Standard and Poors, postponed announcing the obvious for as long as they could.

In attrition war, on the economic front just like the Gaza and other fire fronts, the Axis of Resistance wins by maintaining its offensive capacities and operations for longer than the US and US-backed Israeli forces can defend. Like troops, tanks, and artillery pieces, the operational goal is to grind the enemy slowly but surely into retreat, then capitulation. Last week, Moody’s had already decided in-house to downgrade Israel; for several days senior management fended off a ferocious attack from Israeli officials and their supporters in the US trying to compel postponement of the downgrade and the analytical report substantiating it.

On February 6, in a review of the shekel, bond, credit default swaps (CDS), budget deficit, and other indicators, the conclusion was there could be no stopping the money markets from moving against Israel. Negative ratings from the agencies raise the cost of servicing Israel’s state and corporate bonds, and put pressure on the state budget. A ratings downgrade is a signal to the markets to go negative against the issuer – this usually comes after the smart money has changed its mind and direction. In Israel’s case, however, there has been an exceptional delay between negative outlook and downgrade. The last Fitch report on Israel was dated October 17; Moody’s followed on October 19; Standard & Poors (S&P) on October 24. That Israeli and US tactics had forced postponement of new reports from the troika was obvious. A fresh warning was published on this website: as real estate and other tax collections collapse, Israel will have to make a large cash call on the US. This is going to come in the near future, just as the government in Kiev has been forced into calling on Congress as the Ukraine war is being lost. The longer both wars are protracted, the more obviously the loss of confidence expresses itself in Washington. Moody’s has now caught up. According to the Israeli press, this is the first credit and currency downgrade in their country’s history.

In a report dated last Friday but not issued until Saturday, the Jewish sabbath, the agency officially reduced Israel’s rating from A1 to A2, and added pointers of further downgrading to come. The Anglo-American press immediately reacted against Moody’s. “Israel hits back”, the Financial Times headlined. The newspaper added: “[Prime Minister Benjamin] Netanyahu, in a rare statement over the Jewish Sabbath, said: ‘The rating downgrade is not connected to the economy, it is entirely due to the fact that we are in a war. The rating will go back up the moment we win the war — and we will win the war.’” In the Associated Press report, “Israel’s finance minister blasts Moody’s downgrade”. Rupert Murdoch’s platform Fox claimed: “Israel has a strong, open economy despite Moody’s downgrade”. “Israel’s creditworthiness remains high,” according to the New York Times, “but the rating agency noted that the outlook for the country was negative… A rating of A2 is still a high rating.”

The press release version of Moody’s report is republished verbatim so that its meaning can be understood without the propaganda. Three points have been missed in the Anglo-American counterattack and Israeli government’s bluster. The first is the warning that Israel will soon have to request enormous cash backing from the US, and if there is any sign of weakening on that in Washington, the collapse of the Israeli economy and its capacity to continue its war is inevitable. The Moody’s report camouflaged the point this way: “The related issuances benefit from an irrevocable, on-demand guarantee provided by the Government of the United States of America (Aaa negative) with the government acting through USAID. The notes benefit explicitly from ‘the full faith and credit of the US’ and as per prospectus, USAID is obligated to pay within three business days if the guarantee is called upon.”

The second point strikes at announcements from Israel Defence Forces (IDF) generals and Netanyahu of their plan to expand their operations on the northern front – the Litani River ultimatum they called it in December. According to Moody’s report, “downside risks remain at the A2 rating level. In particular, the risk of an escalation involving Hezbollah in the North of Israel remains, which would have a potentially much more negative impact on the economy than currently assumed under Moody’s baseline scenario. Government finances would also be under more intense pressure in such a scenario.”

The third point is the most explosive. After cutting Israel’s rating to A2, Moody’s warned that further and deeper downgrades may follow, but that there is presently no way the ratings agency can predict what will happen next. “The ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.” In flagging those last four words – “for the foreseeable future” — Moody’s has told the markets that the strategic initiative in this war has now passed to the Axis of Resistance. Of course, the Arabs and Iranians already know.

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