The main damage the downgrade does to Israel's banks is to their image, a Tel Aviv brokerage said today.

Discussing the credit rating cut from A-minus to BBB+ for Hapoalim and Leumi, Nessuah Zannex analyst Ronit Goodman said the unkindest cut is in the eyes of foreign bodies.

"Companies are having trouble recruiting investors and the banks are having trouble securing credit abroad. Granted, credit for businesses has grown more expensive since the rating cut, but only mildly so," Goodman added.

Foreign banks are reportedly refusing to grant long-range foreign currency credit to Israeli banks, which has created a crunch in forex-denominated credit for businesses in Israel. When companies can obtain forex credit, it costs them more than before the downgrade. But Goodman notes that the cost of credit had been rising before the rating cut.

In the short run, she sees most businesses meeting the heavier financing costs, and generating more financing income for the banks. But in the medium to long run, these higher costs will cause more defaults on debt and bankruptcies, and more provision for doubtful debt for the banks, Goodman concluded.

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