Could the law weakening the role of the attorney general passed by the Knesset yesterday lead to a downgrade of Israel’s credit rating? The other day, international rating agency Moody’s released a survey of the Israeli economy, and alongside a positive assessment of the economy’s strength amid the geopolitical risks, it also warned that erosion of the independence of the legal system was liable to lead to a downgrade. The Knesset passed the law shortly afterwards. Analysts expert in the agency’s methodology who talked to "Globes" said that it was unlikely to downgrade Israel’s rating on the basis of that law alone, but former deputy governor of the Bank of Israel Prof. Nadine Baudot-Trajtenberg warned that "the latest moves certainly justify a rating downgrade, and the only thing supporting us is the proximity of the elections and the chance of repairing the damage."
The survey that Moody’s published this week does not represent a rating action, nor is it an indication that such action is to be expected very soon. Moody’s next rating decision is due in November, after the Knesset election. The agency’s sovereign rating for Israel remains at Baa1 with a stable outlook.
As in its rating decision in January, when it raised the rating outlook to stable from negative, the agency says that the state’s institutions are still strong, but this time it adds that they have been weakened in recent years. It says that Israel’s rating could rise if geopolitical risks ease and if the government carries out the necessary fiscal adjustments, but that a downgrade could result from security tensions, weaker economic forecasts, and further erosion of state institutions, particularly if the independence of the legal system is harmed by structural reforms.
The score Israel received for institutional strength puts it in the lowest rank of countries considered to have strong institutions, alongside the Czech Republic and Slovenia. Below Israel are Romania, Brazil, Mexico and Turkey. In the view of analysts familiar with Moody’s methodology, the main reason for Israel’s current score in this category is the independence and strength of the Bank of Israel.
Meanwhile, the Knesset has embarked on a legislative blitz just before its dissolution, in which it has passed several controversial laws, among them the law weakening the role of the attorney general, which will come into force in January. The law defines the attorney general’s function for the first time. He or she will provide legal opinions to all arms of the executive, but, by contrast with today’s status, the government will be entitled to determine that the attorney general’s opinion will not be considered a definitive statement of existing law. This will not apply to the exercise of powers in the criminal sphere. The government will also be entitled to decide that the attorney general will not represent it if it does not accept his or her legal stance. In its final version, the law does not include changes to the procedures for appointing and dismissing the attorney general, but it does stipulate that by the end of January 2027 the government will decide on these matters.
It is worth mentioning that the rating agencies give high ratings even to countries that are not democracies, such as the UAE. Moreover, when it comes to the independence of the judicial system, the agencies emphasize the ability to do business in a country, and whether contracts signed in it are subject to stable legislation the interpretation of which is clear. The fear is that changes in the legal system will ultimately affect the ability to do business. It is doubtful whether the recent legislation is a trigger for Moody’s to downgrade its rating for Israel, given the closeness to the election, but there are those who believe that as long as there is no change in the government’s policy or its make-up, the chance of a downgrade will grow.
Published by Globes, Israel business news - en.globes.co.il - on July 16, 2026.
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