(Reuters) -Fitch on Tuesday placed Israel's sovereign debt rating of "A+" on rating watch negative and warned a major escalation of the ongoing conflict with the Palestinian Islamist group Hamas could result in a negative rating action.
The ratings agency said the risk that others hostile to Israel could join the conflict at scale has risen significantly.
Large-scale escalation, in addition to human loss, could result in significant additional military spending, destruction of infrastructure leading to a large deterioration of Israel's credit metrics, according to Fitch.
There has been a huge spike in the cost of insuring Israel's government debt using what are known as credit default swaps (CDS). Investors use CDS either as a protection tool or to speculate and last week the cost of buying Israel CDS has surged 80%.
Prevailing conditions likely support its current rating, the ratings agency added.
"The combination of Israel's dynamic, high-value added economy, the record of resilience to regional conflict, preparedness for military confrontations, solid fiscal and external metrics and cash buffers make it unlikely a relatively short conflict largely confined to Gaza will affect Israel's rating," Fitch said.
Israel has never been downgraded by Fitch and rival rating agencies S&P Global and Moody's (NYSE:MCO).
Moody's warned last week that a prolonged conflict with Hamas could drag down the country's credit score.
Israel has vowed to annihilate the Islamist group after Hamas gunmen crossed the border and killed 1,300 people, mainly civilians, during a rampage through southern Israeli communities on Oct. 7, the deadliest single day in Israel's 75-year history.