Morgan Stanley lowers Israel’s sovereign credit as Moody's issues warning

The US investment bank Morgan Stanley lowered Israel's credit worthiness on Tuesday on the backdrop of the government's controversial judicial reform plans, as the financial agency Moody's warned of "significant risk" as judicial overhaul crisis continues. 

"There is a significant risk that political and social tensions over the issue will continue with negative consequences for Israel's economy and security situation," Moody's said in a statement sent to Al-Monitor.

Morgan Stanley moved Israel's sovereign credit rating to a "dislike stance" in response to the reforms. The bank noted "risks" as well as "increased uncertainty about the economic outlook," Reuters reported.

A sovereign credit rating is an assessment of a state's credit worthiness and helps assess the risk of investing in a country's debt.  

The moves follow the Israeli Knesset passing the "Reasonableness Clause" of the government's judicial reform plans on Monday in a narrow vote split along party lines. The clause aims to prevent Supreme Court oversight over government decisions, including the nomination of ministers and senior government positions. 

Prime Minister Benjamin Netanyahu responded to Moody's on Tuesday. "When the dust settles, it will be clear Israel's economy is very strong," read a statement from his office in which Netanyahu specifically pointed to Israel's energy sector. 

Background: Netanyahu has been pushing his judicial overhaul since returning to office last December. The reform package seeks to limit the Supreme Court's ability to overturn government decisions. Netanyahu's current cabinet includes several right-wing Jewish nationalist parties, and the Israeli right has long held the court in contempt for reversing certain decisions including those regarding Israeli settlements in the West Bank. Critics of the reform say it amounts to an erosion of the court's power and is thus a threat to democracy. 

Why it matters: Protests against the reform are escalating and demonstrators number in the thousands, including around 10,000 Israel Defense Forces reservists. On Monday, former Prime Minister Ehud Olmert warned Israel is "going into a civil war." Several Israeli newspapers published an all-black ad from a protest group on their front pages Tuesday morning. 

This is not the first time financial institutions have warned the Israeli government over the reform. Moody's downgraded Israel's credit outlook in April following a warning from the British bank HSBC on the potential negative economic consequences of the reform.