Moody's warns of significant ratings impact for Israel from all-out conflict

By Marc Jones and Steven Scheer

LONDON/JERUSALEM (Reuters) -An all-out military conflict with Hezbollah or Iran could have significant "credit consequences" for Israeli debt issuers, credit ratings agency Moody's said on Tuesday.

"We continue to assume that the ongoing tensions will not escalate into an all-out military conflict between the two sides or extend to involve Iran, thus limiting the immediate credit-negative impact on the region," the ratings agency said in a statement.

"However, an all-out military conflict with Hezbollah or Iran could have significant credit consequences for Israeli debt issuers."

Moody's in February downgraded Israel's credit rating to A2 with a negative outlook, citing material political and fiscal risks for the country from its war with the Palestinian militant group Hamas.

In a separate report, S&P Global Market Intelligence - separate from its Global Ratings division - said it was unlikely that the Israeli government, Hezbollah or Iran intends to escalate this round of confrontation into a wider conflict.

The "stance on both sides, combined with the very limited number of Israeli casualties and apparent lack of significant material damage from the attacks in Israel, are likely to provide a sufficient off-ramp from additional escalation," it said.

Hezbollah launched hundreds of rockets and drones at Israel on Sunday, while Israel's military said it struck Lebanon with around 100 jets to thwart a larger attack, in one of the biggest clashes in more than 10 months of border warfare.

S&P Global Ratings cut Israel's rating in April and Fitch followed suit in August.

The S&P report said that while Hezbollah is likely deterred from a full-scale war, Iran was still likely to seek a military response to the assassination of Hamas leader Ismail Haniyeh in Tehran, but most likely it would be limited in scope.

"Iran’s leadership has, we assess, even more incentive than Hezbollah to avoid a regional war that would be likely to involve direct Israeli and US military strikes on Iran," it said.

An Israeli-Hamas ceasefire deal that would bring back Israeli hostages held in Gaza, it added, "would allow Iran’s leadership to present it as a result of effective Iranian military pressure."

(Reporting by Marc Jones and Steven Scheer, editing by Karin Strohecker, William Maclean)