By Mitchell A. Silk
Sovereign credit ratings are supposed to reflect a country’s ability and willingness to repay debt. Pension-fund decisions are supposed to maximize value for retirees.
But in recent months, Israel has found itself on the wrong end of both with politically driven decision-making undermining market integrity and challenging the sound stewardship of pension funds of New York City’s hard-working civil servants.
Two recent developments illustrate the point: Moody’s Investor Service’s decision to downgrade Israel’s sovereign credit rating below those of S&P and Fitch Ratings, citing political risk; and New York City Comptroller Brad Lander’s decision to stop reinvesting city pension cash in sovereign Israel Bonds.
These actions mark a troubling shift, enabling fiduciaries and credit rating agencies to pursue political agendas at the expense of market growth, stability and integrity.
Let’s start with Moody’s.
Late last year, the agency downgraded Israel’s sovereign credit rating to Baa1, placing it two notches below S&P and Fitch. A two-notch divergence, explicitly based on politics, is exceedingly rare.
By reference over the past decade, Moody’s cut Turkey’s rating after the 2016 attempted coup, citing rule-of-law concerns. That same year, Turkey’s GDP contracted 1.8% in the third quarter, the lira sank more than 20%and reserves were drawn down by billions.
Again in 2022, Moody’s downgraded Ukraine to a Ca rating, citing “security and governance” risks, after its GDP plunged nearly 30%, exports collapsed and two-thirds of power generation was disrupted.
In contrast, Israel’s economy, markets and finances have delivered astonishing returns since Oct. 7, 2023. Over that period, the Tel Aviv 125 Index has surged roughly 80% in dollar terms, making it the world’s best-performing major equity market.
Despite wartime disruptions, Israel’s GDP rebounded with 3.8% annualized growth in the third quarter of 2024 and a full-year growth of 1%, with forecasts near 3.5% in 2025.
The shekel remains strong, credit risk premiums have tightened and foreign investment in high-tech continues unabated.
Therefore, Moody’s justification for its decision, “political risks” and “institutional strength,” smacks of geopolitical subjectivity rather than objective financial analysis.
It’s precisely this shift from creditworthiness assessments grounded in fiscal metrics and institutional quality to geopolitical musings that risks market distortions.
This rating downgrade is not a harmless quirk. A lower Moody’s rating disqualifies Israel’s debt from certain institutional portfolios. It raises borrowing costs, and it casts a reputational shadow over Israeli financial assets.
But Moody’s isn’t alone in letting politics seep into financial judgments.
New York City’s Lander, earlier this year, quietly ended a decades-long practice of purchasing Israel Bonds through the city’s pension cash-management desk.
He later justified the decision by pointing to portfolio liquidity preferences, credit ratings and foreign-sovereign allocation guidelines.
But in letters to the mayor’s office, Lander went further, claiming that continuing to buy Israel Bonds would constitute a “politically motivated” investment.
If politics influenced this decision, it may lie less in the act of holding Israel Bonds than in the optics of distancing from them, particularly given Lander’s progressive political stance and public support for Zohran Mamdani, the Democratic Party nominee for New York City mayor.
Lander claims he is simply treating Israel the same as other countries. But that’s not what’s happening here. This is, plain and simple, a de facto boycott of Israeli sovereign debt justified under technical pretense and policy nuance.
We must not allow politicized discretion to corrode financial objectivity and fiduciary obligation. Sovereign credit ratings should be transparent, consistent and data-driven, not shaped by the geopolitics of the moment.
Public pension funds, particularly those managing taxpayer-backed retirement funds, must adhere to the fiduciary duty of impartiality and not selectively rewrite investment rules when Israel, or some other perceived undesirable, is involved.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act gave the SEC clear authority to oversee credit rating agencies after its failures in the 2008 financial crisis.
It requires public disclosure of methodologies and exposes them to liability for biased or inaccurate ratings, promoting transparency, accountability and consistent use of data-driven criteria. Those safeguards now need to be enforced.
It is time for regulators, including the SEC, the U.S. Treasury and, at the international level, the International Organization of Securities Commissions, to demand transparency.
Asset managers and ratings agencies should disclose how they treat political risks and demonstrate consistency across all countries. Investors deserve a market where risk, not rhetoric, determines capital flows.
When we politicize credit, we compromise credibility. When we abandon neutrality in investing, we damage the trust that underpins our capital markets. And when we single out one country, Israel, for exclusion, we weaken our financial system.
Mitchell A. Silk served as assistant secretary for international markets at the U.S. Treasury.
