Moody’s downgrades Israel, warns downgrade to “junk” by Reuters

(Reuters) – Moody’s (NYSE: ) on Friday downgraded Israel’s credit rating by two notches to ‘Baa1’ from ‘A2’ and maintained a negative outlook amid the region’s escalating conflict with the Lebanese armed group Hezbollah.

“The key driver for the downgrade is our view that geopolitical risk has further intensified significantly to very high levels, with significant negative consequences for Israel’s creditworthiness in both the short and long term,” Moody’s said.

The downgrade kept Israel’s rating at three notches investment grade. However, Moody’s warned that uncertainties about the country’s security and its long-term economic growth prospects “are much higher than is typical at the Baa rating level.” A drop below that level would mean Israel would lose its investment grade rating.

“The ratings would likely be downgraded further, possibly by several notches, if current heightened tensions with Hezbollah were to develop into a full-scale conflict,” Moody’s said.

Typically, a loss of the investment grade rating means an increase in the cost of debt servicing and could force some investors to sell their holdings – further pushing down the market price of Israeli bonds.

Ratings agency Fitch last month downgraded Israel’s credit rating to ‘A’ from ‘A-plus’ and maintained a negative rating outlook.