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Moody's Investors Service (NYSE: MCO) downgraded Israel's credit rating by two notches on Friday, from "A1" to "Baa1," amid escalating geopolitical tensions with the Lebanese armed group Hezbollah. The credit rating agency also maintained a negative outlook on Israel’s financial standing.
“The key driver for the downgrade is our view that geopolitical risk has intensified significantly, with material negative consequences for Israel's creditworthiness in both the near and longer term,” Moody’s said in a statement.
Higher Uncertainty Over Israel's Economic Prospects
While Israel’s rating remains three notches within investment-grade status, Moody’s highlighted that uncertainties surrounding the nation's security and long-term economic growth prospects are "much higher than is typical at the Baa rating level." A downgrade below this level would lead to a loss of investment-grade status.
“The ratings would likely be downgraded further, potentially by multiple notches, if the current heightened tensions with Hezbollah turn into a full-scale conflict,” the agency warned.
Economic Impact of Downgrade
A loss of investment-grade status would typically lead to higher costs for servicing national debt and could force some investors to sell their holdings, exerting downward pressure on the market price of Israel’s bonds.
The downgrade comes after Fitch Ratings lowered Israel’s credit rating from "A+" to "A" last month, also maintaining a negative outlook.
