EU loses top credit rating after S&P downgrade

23 Dec 13

Credit rating agency Standard & Poor’s has downgraded the European Union from the top triple-A category due to a fall in the overall creditworthiness of the economic bloc’s 28 member states

By Richard Johnstone | 23 December 2013

Credit rating agency Standard & Poor’s has downgraded the European Union from the top triple-A category due to a fall in the overall creditworthiness of the economic bloc’s 28 member states.

In an announcement on Friday, S&P said the revision to AA+ was also the result of increasingly contentious budget negotiations, which had increased the volatility of member states’ financial support to the EU.

The European Commission, acting on behalf of the EU, issues debt to fund both support to eurozone members under the European Financial Stabilisation Mechanism and an aid programme for non-members.

Examining the EU’s finances, S&P highlighted that since the AAA rating was put on negative watch in January 2012, the average rating of the net contributors to the EU had fallen from AA+ to AA. Only six EU members now hold the firm’s top rating – Denmark, Finland, Germany, Luxembourg, Sweden and the United Kingdom.

The agency also criticised the union’s seven-year budget framework, which was agreed earlier this month.

The Multiannual Financial Framework for 2014-2020 is intended to implement a real-terms cut in EU spending, but S&P questioned whether this would be delivered. ‘We see the possibility that negotiations may be reopened over the course of the MFF,’ the long-term rating update stated.

Responding to the downgrade, commission vice president Olli Rehn said he disagreed with the assessment, highlighting the fact that the two other major rating agencies – Fitch and Moody's – have retained the EU at triple-A.

‘The commission's view is that the EU credit rating should be essentially assessed on its own merits, due to the special treaty-based status of the EU budget, the very strong budget revenues from EU own resources and the treaty obligation from the 28 member states to always balance the EU budget,’ Rehn said.

‘The commission disagrees with S&P that member states’ obligations to the budget in a stress scenario are questionable. All member states have always – and also throughout the financial crisis – provided their expected contributions to the budget in full and in time.’