Israel’s credit rating downgraded because of war with Hamas

Israel’s prolonged war with Hamas is going to become a significant economic and political burden for the country over the long haul, Moody’s said Friday. So the agency downgraded Israel’s credit rating.

Moody’s Investors Service downgraded Israel’s debt rating from A1 to A2 on Friday, underscoring the economic damage of the country’s war with Hamas, which has resulted in thousands of human casualties and stoked geopolitical tensions around the world.

In a Friday statement, Moody’s said the primary driver of its decision was an “assessment that the ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.”

While an A2 rating is still considered investment grade, the downgrade will likely make it more expensive for Israel to borrow money.

In mid-October, less than two weeks after Hamas’ deadly attack on Israel on October 7, Moody’s warned that Israel’s credit rating was in danger of a downgrade.

At the time, Moody’s said that while Israel’s credit profile had been resilient to military conflict in the past, “the severity of the current military conflict raises the possibility of longer lasting and material credit impact.”

On Friday, the credit ratings agency said its decision was based on Israel’s projected higher budget deficit due to increased military spending, saying it expects Israel’s defense spending to be nearly double the level of 2022 by the end of 2024 and potentially rise even higher in the coming years.

“While there are currently negotiations underway to secure the release of the hostages against a temporary ceasefire and more humanitarian aid into Gaza, there is no clarity on the likelihood, time frame and durability of such an agreement,” the agency said.

Moody’s also warned of the “significant” risk of an escalation of the current conflict, including the potential involvement of Hezbollah, an Islamist group with paramilitary forces to the north of Israel.

“Conflict with Hezbollah would pose a much bigger risk to Israel’s territory,” Moody’s said.

– CNN’s Matt Egan contributed reporting.