Moody's international credit rating agency on Wednesday downgraded Israel's banking system outlook to negative from stable. The agency took the step in response to the "projected slowdown in economic growth and the country's challenging operating environment which will continue over the 12-18 month outlook period."
The Bank of Israel responded to the downgrade, saying that it was studying the report and will seek to draw from it the appropriate conclusions.
In its report, entitled "Banking System Outlook: Israel," the agency predicted that GDP growth would decelerate significantly in 2012, mainly due to weakening export demand stemming from the unresolved eurozone crisis.
Moody's was also pessimistic about Israel's security outlook, emphasizing "growing geopolitical tensions" that could compromise business confidence and economic activity. The agency underscored this phenomenon by singling out the Iranian threat and the Arab Spring - which it called the "changing political landscape in neighboring countries."
The agency was particularly critical of banks' concentrated loan exposures to highly-leveraged Israeli conglomerates, which it said will cause credit risks to remain elevated.
The report was not all negative for Israel. Moody's praised the country's resilience, saying that the economy has proven that it can withstand repeated shocks, as it did in the past.