War casts doubt on Israel’s creditworthiness: Rating agencies consider downgrade

2023-10-20 18:15:25

The war is fueling doubts about Israel’s creditworthiness: On Thursday evening, the rating agency Moody’s announced that it would examine Israel’s rating (“A1”) for a downgrade. A few days earlier, Fitch (“A+”) had announced a similar move, while S&P Global (“AA-”) has so far held back. Both Moody’s and Fitch fear that the conflict with the Palestinian terrorist organization Hamas, which operates from the Gaza Strip, will require a longer military operation.

Material effects

For Moody’s analysts Kathrin Mühlbronner and Dietmar Hornung, Israel’s credit profile has so far been resilient to terrorist attacks. “But the scale of the current military conflict increases the risk of longer-term and material consequences,” they say, explaining their decision to examine Israel’s creditworthiness. They want to focus on the duration and extent of the conflict and assess the impact on institutional stability. This is about political efficiency, public finances and the economy. Moody’s expects a review that will take longer than the usual three months.

According to Fitch’s credit assessors, the risk of an escalation of the multi-party military conflict has increased. Here they name the Lebanese Shiite militia Hizbullah, which is supported by Iran, other militant organizations in the region and finally Iran. The largest rating agency S&P Global has so far only made one comment: The conflict between Israel and Hamas increases the already existing geopolitical risks – war in Ukraine, tensions between China and the United States. Nevertheless, S&P analysts see the Gaza conflict as regionally limited. Although the risk of military conflicts with Hezbollah is high, S&P analysts currently believe that Iran’s intervention is unlikely.

Significantly higher risk premium

Israel currently continues to enjoy a first-class rating as a debtor from all three rating agencies. But the escalation of the Gaza conflict is now also putting pressure on government bond prices, which is driving up their yields and risk premiums (spreads). In the market for credit default swaps (CDS), the premium for Israel has risen dramatically since the attack by Hamas terrorists. While the premium was previously 0.6 percentage points or 60 basis points, it is now 137 basis points. This means that insuring a $1 million claim against default costs creditors an annual premium of $13,700. Before the robbery, it only required $6,000.

Published/Updated: Recommendations: 4 Eckart Lohse and Matthias Wyssuwa Published/Updated: Recommendations: 9 Published/Updated: Published/Updated: Recommendations: 3

So far, military and terrorist risks have not affected Israel’s credit rating. But Prime Minister Benjamin Netanyahu’s controversial judicial reform prompted the rating agency Moody’s to lower the state’s rating outlook from “positive” to “stable” in April. The dispute over judicial reform had led to tensions in the country that posed a threat to Israel’s institutional and state strength, the credit assessors explained their move at the time.