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Standard & Poor's downgrades European Union's credit rating

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Staff writer ▼ | December 20, 2013
Standard & Poor's Ratings Services lowered its long-term issuer credit rating on the supranational institution, the European Union (EU), to AA+ from AAA. At the same time, the agency affirmed A-1+ short-term credit rating on the EU. The outlook is stable.
Europe
EuropeStandard & Poor's Ratings Services lowered its long-term issuer credit rating on the supranational institution, the European Union (EU), to AA+ from AAA. At the same time, the agency affirmed A-1+ short-term credit rating on the EU. The outlook is stable.


The downgrade reflects our view of the overall weaker creditworthiness of the EU's 28 member states. Standard & Poor's believes the financial profile of the EU has deteriorated, and that cohesion among EU members has lessened.

Standard & Poor's revised the outlook on our long-term rating on the EU to negative on January 20, 2012. Since then, the average rating of the net contributors to the EU budget (weighted by GDP) has decreased to AA from AA+. Standard & Poor's also lowered the ratings on France, Italy, Spain, Malta, Slovenia, and Cyprus and, on November 29, 2013, we lowered the ratings on one AAA rated EU member (The Netherlands), which now leaves six AAA rated members.

Since 2007, the revenues contributed by AAA rated sovereigns as a proportion of total revenues have nearly halved to 31.6%. The average GDP weighted rating of the EU has declined to between A+ and AA+ over the same period.

The EU's financial arrangements are complex. It does not benefit from any paid-in capital, and as of December 2013 its outstanding loans totaled €56 billion. Standard & Poor's expects that the average maturity of the EU's loan portfolio will increase to 19.5 years (from 12.5 years in 2013) once it extends advances to Ireland and Portugal. Ireland and Portugal together represent 80% of EU loans outstanding.

Standard & Poor's expects that the EU will continue its back-to-back lending and that it will roll-over its debt to match any maturity extension. We view as remote the EU not being able to access capital markets, which we believe minimizes the risk that the loans to Ireland and Portugal could not be extended.

The EU's budget comprises annual revenues, which Standard & Poor's expects will total 0.95% of its GNI (€1,024 billion) over the 2014-2020 multi-annual financial frameworks (MFF). In case of need, these revenues could be reallocated for debt service (Treaty on the Functioning of the European Union, Arts. 310.1 and 323) instead of transfers and other current expenses.

In addition to these recurrent cash receipts, the EU has a contingent claim (fiscal headroom) on EU members, which Standard & Poor's expects to average 0.28% of GNI (or about €30 billion annually) over the 2014-2020 MFF. EU members have made this pledge for the express purpose of backing the EU's financial obligations. Both this pledge and any budgetary payments are joint and several obligations of EU members.

Standard & Poor's believes, however, that the willingness of the remaining AAA rated sovereigns to fulfill this joint and several pledge might be tested should some other members be unwilling to provide the funds on a pro-rata basis.

The stable outlook reflects our view that the risks to our long-term rating on the EU are balanced.


 

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