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Moody's Investors Service said on Tuesday that the controversial overhaul of Israel's judiciary system could plunge the country further into turmoil, which would harm its economy and security.
The credit rating firm stated in a report that there is a high risk of political and social tensions continuing, which could have negative effects on Israel's security and economy.
On Monday, the Israeli parliament passed legislation that stripped the Supreme Court's power to block decisions by government. The dramatic action sparked angry protests and threats of strike by workers, as well as selling from investors. Over the last two days, the Tel Aviv 35 Index fell by 5.2%.
Moody's warns that the situation 'raises the risk of a crisis between the judiciary and the executive', as there have been petitions filed against the bill with the Supreme Court.
Moody's pointed out that the situation is complicated by Israel's lack of a written Constitution and the fact that its institutions heavily rely on judicial supervision and review.
Moody's stated that 'we believe the broad-ranging nature and the proposals of the government could materially weaken or disrupt the independence of the judiciary and the effective checks and balanced between the different branches of government which are important elements of strong institutions'.
Credit ratings company pointed out that civil society groups have been protesting and are likely to continue to do so, as well as military reservists who threatened to stop reporting to training if this bill was passed.
Moody's stated that 'although domestic and geopolitical conflicts have not historically had a significant or lasting impact on Israel's economic situation, a serious increase in tensions between Israel and the Palestinians may endanger improvements' to relations between Israel and regional powerhouses.
Benjamin Netanyahu, the Israeli prime minister, released a statement in response to Moody's' report defending the resilience and strength of the economy.
In a joint press release, Netanyahu and Finance Minister Bezalel Schmotrich said: 'This reaction is only momentary. When the dust settles, it will be clear that Israel's economic strength is strong.' "Israel's economy has solid foundations, and it will continue to grow with experienced leadership who leads a responsible policy."
Moody's changed the outlook of Israel's credit ratings from 'positive' in April to'stable' because it was concerned that Israel's government had 'deteriorated' as a result of the proposed judicial reform.
Moody's now says that some of their earlier 'concerns' regarding the impact of the judicial reform on Israel's economic situation are'starting' to emerge. The firm cited a'materially lower' venture capital investment in Israel's high tech firms, and a'significantly lower' performance for Israel's stock market compared to the Nasdaq.
Moody's stated that 'country-specific considerations' may be holding Israeli tech stocks back. This is 'particularly worrying' as high-tech companies are a major engine of growth for Israel's economy.