In a recent investor update, the credit rating agency S&P has expressed heightened concerns over Israel’s geopolitical and security risks, emphasizing that the potential for a broader conflict in the Middle East poses significant threats to the country. While S&P has not altered Israel’s rating, which was downgraded last April, the agency’s concerns reflect the tense geopolitical situation following recent events.

S&P highlights that the geopolitical and security environment for Israel remains precarious, particularly after the assassinations of key Hezbollah and Hamas leaders in Beirut and Tehran. These incidents have reportedly prompted Iran to consider retaliatory measures, although the specifics regarding the timing and nature of Iran’s response remain uncertain, adding to the overall unpredictability.

The agency outlines two primary scenarios for potential escalation. The first scenario involves a more pronounced conflict between Israel and Hezbollah, which could arise if Hezbollah intensifies its attacks or if Israel undertakes military action in Lebanon to counter Hezbollah’s presence near the border. The second, more severe scenario envisions a wider, sustained conflict directly involving Iran.

Beyond these scenarios, S&P also warns of the risk of unintentional escalation due to accidents or miscalculations, even if Israel, Iran, and Hezbollah do not intend to exacerbate the situation deliberately.

While these potential conflicts are not part of S&P’s baseline rating scenario for Israel, they significantly influence the current negative outlook on Israel’s A+ rating. S&P cautions that an escalation of conflicts could lead to considerable challenges for Israel, including the need to re-mobilize reserves, further evacuate residents, and disrupt education. Such developments would likely have a substantial impact on consumer and business confidence, production, investment, and fiscal performance.

Image credit: S&P Global considered to be one of the world’s largest credit rating agencies. Brendan McDermid/Reuters