Israel downgraded by S&P on risk of military escalation with Iran

There was an apparent drone attack at a major air base and a nuclear site near the central city of Isfahan early Friday, which is suspected of being part of an Israeli retaliation for Tehran’s unprecedented drone-and-missile assault on the country days ago.

S&P’s downgrade was issued shortly before the strike in Iran, and almost three months after Moody’s, another major U.S. credit agency, downgraded Israel’s rating due to the “ongoing military conflict with Hamas.”

S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on Israel to ‘A+’ from ‘AA-’ and the short-term ratings to ‘A-1’ from ‘A-1+.’

The long-term downgrade means Israel’s credit rating has moved from a “very strong capacity to meet financial commitments,” to “a strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances,” according to S&P.

“In our view, the recent increase in confrontation with Iran heightens already elevated geopolitical risks for Israel,” the credit ratings agency said. “We expect a wider regional conflict will be avoided, but the Israel-Hamas war and the confrontation with Hezbollah appear set to continue throughout 2024–versus our previous assumption of military activity not lasting more than six months.”

S&P’s outlook on Israel’s long-term ratings is negative.

The cost of the war is a major drain on Israel’s budget and all three U.S. credit ratings agencies, Moody’s, S&P, and Fitch, which also has offices in London, have issued warnings on Israel’s credit standing since the surprise attack on the country by the ruling Hamas militant group.

S&P typically issues sovereign credit ratings on scheduled dates, but does break with that practice if events merit. S&P’s will issue another ratings review for the country on the date it was originally scheduled to do so, on May 10.

No Iranian official directly acknowledged the possibility that Israel attacked, and the Israeli military did not respond to a request for comment. However, tensions have been high since the Saturday assault on Israel amid its war on Hamas in the Gaza Strip and its own strikes targeting Iran in Syria.