Morgan Stanley cut Israel sovereign credit to a "dislike stance" on Tuesday after the country's parliament passed the first in a series of laws sought by Prime Minister Benjamin Netanyahu to limit the power of the Supreme Court.
"We see increased uncertainty about the economic outlook in the coming months and risks becoming skewed to our adverse scenario," Morgan Stanley's analysts said in a research note.
"Markets are now likely to extrapolate the future policy path and we move Israel sovereign credit to a 'dislike stance'."
They added that recent developments pointed to "continued uncertainty" in Israel and for the shekel currency to weaken and borrowing costs to rise as investors attach a higher risk premium.
The crisis has caused a deep divide in Israeli society and sparked months of mass protests which have seen the shekel fall to a near 3-year low and the stock market (.TA125) lose nearly 10% since November.
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