By Nick Mann | 4 September 2012
Moody’s has changed its outlook on the credit rating of the European Union from stable to negative, bringing it into line with the outlooks assigned to the main contributors to the EU budget.
Last night’s announcement means the EU is one step away from having its triple-A rating downgraded. Moody’s also cast doubt over whether Germany, France, the UK and the Netherlands would be willing to guarantee the EU’s debt needs ahead of their own debt repayments.
With those four countries accounting for around 45% of the EU’s budget, Moody’s said it was ‘reasonable’ to assume that the EU’s credit rating should move in line with their creditworthiness ‘considering the significant linkages between member states and the EU’.
It also highlighted ‘the likelihood that the large triple-A member states would likely not prioritise their commitment to backstop the EU debt obligations over servicing their own debt obligations’.
Moody’s ratings for the EU apply to the borrowing undertaken by the European Commission on behalf of the union and then lent on to members. Loan vehicles include the European Financial Stabilisation Mechanism bailout fund, Balance Of Payments Assistance and Macro Financial Assistance. The EU also acts as guarantor on some lending by the European Investment Bank, but Moody’s retained its stable outlook on the bank’s triple-A rating because of its separate capital and reserves.
The agency noted that, while the EU had structural factors in place that enhanced its creditworthiness, these were not sufficient to delink its ratings from those of its strongest member states.
In particular, it said that if the triple-A rated member states defaulted on their own debt obligations, it would be ‘highly likely’ they would also default on the loans that back the EU debt. The EU’s cash reserves were also likely to be stressed, it added.
A downgrade of the EU’s triple-A rating could occur if the credit ratings of the four major triple-A rated contributors to the EU budget were downgraded.
‘Additionally, a weakening of the commitment of the member states to the EU and changes to the EU's fiscal framework that led to less conservative budget management would be credit negative,’ it said.
But Moody’s said that the EU’s ‘conservative’ budget management and the ‘creditworthiness and support’ offered by the 27 member states meant its rating remained intact. If the outlooks on the ratings of Germany, France, the UK and the Netherlands returned to stable, then the EU’s rating could revert to stable as well.
