Military Conflict Implications for Israeli Debt

By Marc Jones and Steven Scheer

LONDON/JERUSALEM (Reuters) – An all-out military conflict with Hezbollah or Iran could have significant “credit consequences” for Israeli debt issuers, according to credit ratings agency Moody’s (NYSE:MCO).

Moody’s stated, “We continue to assume that the ongoing tensions will not escalate into an all-out military conflict between the two sides or extend to involve Iran, thus limiting the immediate credit-negative impact on the region.”

However, they added, “An all-out military conflict with Hezbollah or Iran could have significant credit consequences for Israeli debt issuers.” In February, Moody’s downgraded Israel’s credit rating to A2 with a negative outlook, citing political and fiscal risks due to the war with Hamas.

A separate S&P Global Market Intelligence report indicated that neither the Israeli government, Hezbollah, nor Iran is likely to escalate the situation into a wider conflict. The report notes, “The stance on both sides, combined with the very limited number of Israeli casualties and apparent lack of significant material damage from the attacks in Israel, are likely to provide a sufficient off-ramp from additional escalation.”

Hezbollah launched hundreds of rockets and drones at Israel recently, prompting Israel’s military to strike back, marking one of the largest clashes in over 10 months.

S&P Global Ratings cut Israel’s rating in April and Fitch followed in August. S&P’s report suggested that while Hezbollah might be deterred from a full-scale war, Iran may seek a military response to the assassination of Hamas leader Ismail Haniyeh in Tehran but is likely to keep it limited.

Iran’s leadership, S&P assesses, has even more incentive than Hezbollah to avoid a regional war due to potential direct military strikes from Israel and the US. An Israeli-Hamas ceasefire that brings back Israeli hostages could allow Iran to claim it was a result of its military pressure.