Moody’s cuts Israel’s rating, warns of drop to ‘junk’

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

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

The downgrade kept Israel’s rating three notches into investment grade. However, Moody’s warned that uncertainties over the country’s security and its longer-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, potentially by multiple notches, if the current heightened tensions with Hezbollah turned into a full-scale conflict,” Moody’s said.

Typically, a loss of investment grade rating means a spike in the cost of servicing debt, and it could force some investors to sell their holdings – further pressuring lower the market price of Israel’s bonds.

Rating agency Fitch downgraded Israel’s credit rating to “A” from “A-plus” last month, and kept the rating outlook negative.