Calcalist, one year after the Gaza war: Israel falls into a debt trap | economy

Israel is falling into an increasingly dangerous negative financial cycle, without clear government action, according to a detailed analysis published in the Israeli newspaper Calcalist, based in parts on reports by international financial and economic institutions.

The report highlights the recent credit rating downgrade by Moody's, high interest rates on Israeli debt, and the absence of a coherent government strategy to manage the growing deficit and mounting debt burdens.

Moody's warning

The credit rating agency Moody's recently lowered Israel's credit rating by two notches. In its report, Moody's emphasized a fundamental concern that “a delayed and slow economic recovery, combined with a prolonged military campaign, will have a lasting impact on the financial situation.”

The agency expected Israel's debt-to-GDP ratio to reach 70%, compared to a previous forecast of 50% before the war, indicating a significant increase in the country's financial risks.

The Calcalist report notes that this finding by Moody's is consistent with other global economic assessments, showing that Israel's rising debt and deficit trends are not isolated instances but rather part of a broader worrying pattern.

Global trends

A study issued by the International Monetary Fund (IMF) last March confirmed that there are 4 factors that determine the sustainability of any country’s debt:

  • Growth rates
  • Debt levels
  • Interest rates
  • And disability

The study indicates that maintaining financial health is a challenge worldwide, and not just in Israel.

In parallel, the World Economic Forum's (WEF) Economic Outlook report warned that more than 53% of senior economists see rising government debt as a major threat to the stability of advanced economies, while 64% expressed similar concerns about emerging economies.

The forum's report – as reported by Calcalist – stated that more than 3.3 billion people live in countries whose governments spend more on debt service than on health care or education, a worrying trend that could harm growth in the long term.

According to the Institute of International Finance (IIF), governments around the world, including Israel, tend to underestimate the true costs of managing their national debt.

The report notes that recent Israeli governments, with the exception of the previous “Government of Change” that reduced debt by 10 percentage points of GDP in two and a half years, have consistently underestimated the fiscal challenges ahead.

Debt trap

The Calcalist report described Israel's situation as one year after the Gaza war, it has fallen into a “debt trap,” where rising deficits lead to higher risk premia, higher interest rates, and lower growth and productivity, causing the debt-to-GDP ratio to accelerate and increasing the burden of servicing… Debt on the government.

The report warns that this negative cycle could lead to reduced government spending on growth-supporting projects, which in turn perpetuates the debt cycle further.

The International Monetary Fund noted that Israel is expected to face one of the highest increases in total financing needs in Europe from 2019 to 2026, reaching about 8% of its gross domestic product, which reinforces the severity of the problem.

Defense spending…Israel's greatest burden

Another dimension of Israel's fiscal challenges is defense spending. According to the Stockholm International Peace Research Institute (SIPRI), cited in the Calcalist report, Israel ranks first among advanced economies in defense spending as a share of GDP, reaching 5.32% in 2023, up from 4.46% in 2022.

Per capita defense expenditures amount to about $3,000, which is much higher than the global average of $341.

This defense spending puts significant pressure on Israel's budget, especially when combined with rising government debt servicing costs. The World Economic Forum report said these expenditures could increase Israel's “financial pressures” and limit its ability to invest in initiatives that support growth.

Per capita defense expenditures in Israel amount to about $3,000, which is much higher than the global average of $341 (French)

Government indifference

Despite all these warnings, the Calcalist report indicated that the Israeli government has not taken any clear measures, and pointed out that Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich are not dealing with the country's growing financial challenges. Instead of taking austerity measures or raising taxes, they continue to deny the need for such steps, even though global demand for government debt is increasing, making it difficult for Israel to secure financing on favorable terms.

Experts warn that the lack of a clear and decisive fiscal policy could significantly hamper Israel's ability to borrow and stabilize its economy.

Calcalist confirmed that the downgraded credit rating has actually put Israel at a disadvantage, making it more expensive for the country to service its debts.

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