S&P warns long war with Iran could sink Israel’s credit rating

Global credit rating agency Standard & Poor’s warns that a protracted war with Iran and a sharp escalation will put Israel’s credit rating at risk of further downgrades.

“Developments in the Israel-Iran conflict are testing S&P Global Ratings’ previous assumptions by increasing downside risk including due to the prospect of further escalation,” S&P analysts say. “Israel says its stated aim of destroying Iran’s nuclear capability could take at least two weeks, possibly longer… this points to a more protracted campaign than the 2024 retaliatory strikes.”

“The likelihood of a diplomatic solution appears increasingly distant,” S&P analysts assess, adding that “thus far, developments suggest attacks and counter attacks are seeking to avoid drawing in third countries, such as the US or Gulf countries.”

In May, S&P reaffirmed Israel’s A/A-1 credit rating — which it downgraded twice last year — while keeping its outlook negative, meaning that the country could be facing further downgrades. The rating agency says the negative outlook reflects the “risk that the escalation of military conflict could substantially weaken Israel’s economy and fiscal and balance-of-payments positions.”

Meanwhile, Fitch analysts say in a separate report that they assume that the fighting will remain “contained between Israel and Iran, and will not persist for more than a few weeks.”

“Israel has strong defensive countermeasures and it appears that Iranian strikes have not had a material economic impact,” Fitch analysts note. “We believe Iran’s capacity to retaliate against Israel via proxies in Gaza and Lebanon has been damaged by Israel’s military campaigns in those regions.”

“Both factors suggest it is likely that damage from Iran’s military response to Israel’s latest attacks will not be on a scale that would affect Israel’s rating,” according to Fitch.

The rating agency, which last year lowered Israel’s credit rating, in April affirmed the country’s A credit score, but maintained a negative outlook.

Fitch says risk for a downgrade will “depend on the course and outcome of the conflict, including whether the conflict remains restricted between Israel and Iran, or spreads.”