Fitch and Moody’s express cautious optimism over ‘fragile’ ceasefire with Hezbollah
Credit rating agencies note that the ceasefire with Hezbollah, if durable, reduces only one source of geopolitical risk while others remain, alongside domestic political concerns
Sharon Wrobel is a tech reporter for The Times of Israel.
Fitch and Moody’s on Thursday expressed some cautious optimism that the ceasefire between Israel and the Lebanese terror group Hezbollah, if durable, would relieve some pressure on the country’s finances. The credit rating agencies, however, cautioned that other geopolitical and domestic risks challenging Israel’s credit standing remain in place.
“The ceasefire, if sustained, will remove a key potential driver for increased conflict between Israel and Iran, a close ally of Hezbollah,” Fitch said. “A durable de-escalation of armed conflict between Israel and Hezbollah… could help to limit pressure on Israel’s public finance metrics.”
In a separate comment, Moody’s called the truce a “positive development,” but emphasized that it “reduces one key source of geopolitical risk, [while] others remain.”
“We have seen the ongoing conflict with Hamas and the escalating hostilities with Hezbollah as a key risk to Israel’s credit standing,” Moody’s said. “It is too early to conclude that these risks will be significantly and sustainably reduced.”
Similarly, Fitch raised concerns that the “ceasefire is likely to be fragile, and prospects for an imminent ceasefire in Gaza remain poor.”
Both, Fitch and Moody’s, over the past year, lowered Israel’s credit score and maintained a negative outlook warning that the country could be facing further downgrades, citing the risk of a severe escalation of the conflict with Hezbollah further weakening the country’s economic and fiscal strength.
A lower credit rating makes it more expensive for the Israeli government to raise debt at a time when it needs billions of shekels to fund the costs of the ongoing war and while investors see more risk to invest in the country.
The ceasefire between Israel and the Iran-backed Hezbollah came into effect early on Wednesday, bringing an end to almost 14 months of Hezbollah-initiated fighting across the northern border, which began the day after the October 7, 2023, Hamas terror onslaught in southern Israel.
Fighting intensified in late September, with Israel killing much of Hezbollah’s leadership and launching a limited ground incursion on October 1.
“The escalation in the conflict with Hezbollah has put pressure on Israel’s fiscal metrics through the cost of reservists mobilized on the northern border, use of military supplies, compensation payments for affected residents, and lower economic activity,” Fitch commented. “The mobilization associated with the push into Lebanon since October 2024 has only reached a fraction of the peak mobilization in Gaza, but an extended war in Lebanon could still hinder Israel’s ability to curb its budget deficit.”
Since Hezbollah began its daily attacks on the north on October 8 last year, an estimated 60,000 residents of northern Israel have been forced to abandon their homes and have been displaced for over a year.
“It remains to be seen whether the ceasefire with Hezbollah will hold and become a permanent agreement that gives Israel’s displaced residents from the north of the country a sufficient sense of security to return home,” said Moody’s. “This will be the ultimate test of the effectiveness of the agreement.”
Fitch cautioned that while a sustainable ceasefire with Hezbollah would reduce war costs, “developments in Gaza and with Iran will still play an important role in determining Israel’s fiscal and economic trajectory.” Back in August, Fitch downgraded Israel’s credit rating by one notch from A+ to A.
Further commenting on the war in Gaza, the credit ratings agency said that expected the fighting to continue into 2025.
“This implies continued elevated spending on immediate military needs, and disruption to production in the border areas, as well as to tourism and construction,” Fitch said.
In September, Moody’s slashed Israel’s credit rating by two notches from A2 to Baa1, citing concerns over heightened domestic political and geopolitical risks, alongside the lack of an Israeli “exit strategy.”
“The Israeli government has not presented a credible plan for Gaza that would bring durably stronger security for Israel,” Moody’s said in the update. “The risk of an escalation with Iran remains.”
Additionally, Moody’s reiterated concerns that the Israeli government was continuing to pursue policies that add to already high social tensions in the country, such as a “renewed confrontation between the government and the judiciary over the composition of the Supreme Court, and the government’s attempt to permanently exempt the ultra-orthodox from military service, which many Israelis disagree with.”
