Moody's Downgrades Israel's Credit Rating
LONDON, UK – Moody’s Ratings has downgraded the government of Israel’s long-term local and foreign-currency issuer ratings from A2 to Baa1. The local-currency and foreign-currency senior unsecured ratings have also been downgraded to Baa1, Moody’s 8th highest rating, along with the foreign-currency senior unsecured shelf and MTN ratings, which were lowered from (P)A2 to (P)Baa1. The outlook for these ratings, the ratings agency said, remains negative.
Moody’s affirmed Israel’s backed foreign-currency senior unsecured rating at Aaa, reflecting an irrevocable, on-demand guarantee from the U.S. government, through the U.S. Agency for International Development (USAID). This guarantee covers both principal and interest payments, explicitly backed by “the full faith and credit of the U.S.,” with USAID committed to payment within three business days if the guarantee is called upon.
The downgrade was primarily driven by Moody’s assessment that Israel’s geopolitical risks have significantly intensified, negatively impacting the country’s creditworthiness both in the short and long term. “The recent escalation of conflict between Israel and Hezbollah has heightened concerns, especially as Israel aims to return evacuated residents to its northern regions, a goal likely requiring further military action. In addition, the prospects for a ceasefire in Gaza have diminished, and domestic political risks have grown alongside the increased geopolitical instability,” Moody’s said.
The agency also highlighted concerns over Israel’s longer-term economic outlook, suggesting that the current conflict could have more severe and lasting economic consequences than initially anticipated. “With heightened security risks, the likelihood of a swift and strong economic recovery typical of previous conflicts has diminished. A delayed recovery, combined with a prolonged military campaign, may put further strain on public finances, delaying efforts to stabilize Israel’s public debt. The escalating geopolitical risk also raises concerns over the quality of Israel’s institutions and governance, which have not sufficiently mitigated risks to the country’s credit profile,” Moody’s said.
The negative outlook for Israel’s rating at Baa1 reflects persistent downside risks. A significant escalation of the conflict with Hezbollah could lead to a further downgrade, particularly if Israel’s economic and fiscal health weakens further, Moody’s said. Although the risk of broader escalation involving Iran remains low, it cannot be ruled out. Moody’s noted heightened uncertainty regarding the countrys security and long-term growth prospects, with specific concerns about the highly mobile high-tech sector. These factors could have severe implications for government finances and further erode institutional quality, the agency noted.
Additionally, Moody’s has reduced Israel’s local-currency and foreign-currency country ceilings from Aaa to Aa3, citing the elevated geopolitical risks. Despite this, the four-notch gap between the country ceiling and the sovereign rating reflects the limited government footprint in Israel’s diversified economy and external stability. The foreign-currency ceiling, aligned with the local-currency ceiling, reflects low transfer and convertibility risks, bolstered by Israel’s open capital account, significant foreign currency reserves of nearly 40 percent of GDP, and effective policy measures, Moody’s noted.