Israel Faces First Ever Credit Rating Downgrade Threat... Default Risk Highest in 10 Years

The risk of national default for Israel, which is at war with the Palestinian armed group Hamas, is soaring. It is estimated that the economic losses caused by this war will exceed at least 9 trillion won, leading to expectations of a sharp increase in fiscal spending and national debt. Moody's, one of the global credit rating agencies, has begun considering a downgrade of Israel's credit rating for the first time in history.

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According to the global financial market on the 15th (local time), the credit default swap (CDS) premium, which indicates Israel's risk of national default, recorded 106.96 basis points (as of October 13) for the 5-year term. This is the highest level in 10 years since November 2013.

Just six days before Hamas invaded Israel on the 7th, on the 6th, Israel's CDS premium was 58.19 basis points. This figure surged vertically by more than 30 basis points in just one day on the 10th after Hamas's invasion, and on the 12th, it surpassed 100 basis points for the first time. This level is higher than the CDS premium of Peru, whose national credit rating is three notches lower than Israel's.

As Israel enters the final countdown to deploying ground troops in the Gaza Strip and the armed conflict with Hamas is expected to prolong, the risk of national default is rapidly increasing. Signs of the war spreading to Middle Eastern regions such as Iran and Lebanon are emerging, heightening geopolitical instability.

Moody's has indicated that it may downgrade Israel's credit rating. Moody's stated, "We continue to assess the broad credit risks arising from recent hostilities," and warned, "If the conflict persists, the resilience of the Israeli government will be placed in a precarious position." Israel's current sovereign credit rating is 'A1' with a stable outlook. Moody's postponed the scheduled credit rating review on the 13th.

If Moody's downgrades Israel's credit rating in the future, it will be the first time in history. Despite experiencing multiple armed conflicts and the global financial crisis, Israel's credit rating has never been downgraded. Bloomberg News analyzed that the political turmoil caused by Prime Minister Benjamin Netanyahu's judicial reform, combined with this war, has put Israel's sovereign credit rating at risk of being downgraded for the first time. A downgrade in the sovereign credit rating is expected to sharply increase the Israeli government's funding costs.

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If the war prolongs, a sharp increase in Israel's fiscal spending is inevitable. Deutsche Bank AG, a German bank, predicted that the more the United States expands support for Israel, the more the Israeli government will increase additional spending. On the other hand, government revenues are expected to decline. Immediately after the war, the Israeli government issued government bonds worth $200 million (approximately 270 billion won).

Israel's economic losses will also snowball. Bank Hapoalim, an Israeli bank based in Tel Aviv, estimated that the economic losses from this armed conflict will reach at least 27 billion shekels (approximately 9.2 trillion won).

As concerns in the global financial market grow, the Israeli government and monetary authorities are focusing on minimizing the financial market shock caused by the war. The government argues that public debt is relatively low at 60% of gross domestic product (GDP), and the fiscal deficit is 2% of GDP, so there is sufficient room to increase future defense spending.

Amir Yaron, Governor of the Bank of Israel, said, "Every war has significant economic repercussions, including impacts on financial markets. With many reservists on the front lines and civilians in shelters, the impact on the real economy is inevitable," but added, "I believe it will be manageable through appropriate budget adjustments."

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