S&P ratings agency has downgraded Israel. What does it mean?

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on Apr 19, 2024
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  • Just hours ago, Israel received a ratings agency, from S&P Global.
  • This is only the second in the nation's history, but also its second one this year.
  • But what exactly does a downgrade mean? We unpack it below.

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Ratings agency S&P Global has downgraded the nation of Israel from an ‘AA-’ to an ‘A+’ rating, with a negative outlook.

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The agency released a statement on the matter saying:

On April 18, 2024, S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on Israel to ‘A+’ from ‘AA-‘ and the short-term ratings to ‘A-1’ from ‘A-1+’. The outlook on the long-term ratings is negative. We also revised the transfer and convertibility assessment to ‘AA’ from ‘AA+’.”

Unsurprisingly, the decision was based on Israel’s continuing conflict with Iran and the financial instability caused by the costs of the war for the nation.

The Moody’s agency decision

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This is Israel’s second vote of no confidence from a ratings agency, after fellow ratings agency Moody’s Investors Service downgraded Israel on February 9th.

With Moody’s, Israel’s foreign-currency and local-currency senior unsecured ratings went from an A1 to an A2 rating, and the foreign-currency senior unsecured shelf and senior unsecured MTN programme ratings both went from a (P)A1 to a (P)A2 rating, with a negative outlook.

This was Israel’s first-ever ratings downgrade in the history of the nation, only to be swiftly followed by a second one within less than three months.

The Fitch Ratings agency decision

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Meanwhile, the third of the world’s major bond-rating agencies, Fitch Ratings, upgraded its rating of Israel earlier this month on April 2nd.

The agency has removed Israel from Rating Watch Negative (RWN), after having given it the negative rating in October last year. Fitch also affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’, albeit with a Negative Outlook.

But what does it mean?

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Ratings from a recognised ‘big three’ agency are all about how reliable an investment a country is considered, in terms of the risk of whether or not it will honour debts like bonds or instead default on debts.

As the World Economic Forum explains, the downgrade from S&P to Israel essentially means that the country was considered ‘very low risk of default’, but is now only considered ‘low risk of default’. And its short-term prospects are now considered negative by the ratings agency, although its longer-term forecast for the country is still positive.

What this means is that, with a lower ‘trust ranking’ from two out of the three big agencies, Israel is seen as a ‘riskier; investment than before.

Typically, in this scenario, borrowing becomes more expensive for a nation, as investors demand higher returns (for example, on government bonds) in order to recompense them for the increased risk they’re taking.

For a country already financial burdened with the costs of war, like Israel is, the economic consequences could be quite far-reaching.

Next steps

S&P’s next scheduled ratings review for Israel is on May 10, 2024. It is unknown when Moody’s next review of the nation will be.

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