Tuesday, 24 December 2013

EU downgraded by S&P's but UK rating affirmed

On 20th December, Standard & Poor's, one of the 'Big Three' credit rating agencies, downgraded the European Union's long term rating to AA+ from AAA, citing reasons of contentious budget negotiations. This signals a slight heightening of the risks that the EU's borrowing capacity on the international markets will not be supported by its Member States. However, S&P's states that the stable outlook on the rating indicates that there are still highly rated sovereigns within the EU who are prepared to support the supranational organisation. The short term credit rating on the EU is affirmed at A-1+ with a stable outlook. 

The deteriorating credit conditions within the EU have also played a role in the downgrade, with weaker credit positions among several of the Member States. This economic appraisal is accompanied by the more political assessment that cohesion across the Union has weakened, elevating the risk profile. The long term rating on the EU was revised to a negative outlook in January 2012, however since that time the average ratings of the net contributors to the EU budget has decreased from AA+ to AA. Also, the downgrade of the Netherlands in November 2013 means that there are now only six Member States with AAA ratings. Moreover, since 2006, S&P's claims, the revenues contributed by AAA-rated sovereigns as a proportion of total revenues contributed, has nearly halved to 31.6 percent. 

Currently, 80 percent of EU loans to Member States that are outstanding are to Ireland and Portugal. The CRA believes that the chance of the EU being unable to access credit markets to extend these loans is "remote". However many of the other reasons stated for the increase in risk of long term EU supranational borrowing is notably political. S&P's notes that the willingness of Member States to contribute to meeting the EU's financial commitments on a pro rata basis could be tested in future. Added to this is the proposed referendum in the UK about continued membership of the Union, which the ratings agency describes as an unprecedented step for a sitting Parliament to take, and which could - by implication - have ramifications both for the UK and the EU. 

The EU is currently rated AAA by Moody's with a negative outlook.

A couple of days later, S&P's affirmed the UK's AAA/A-1+ (unsolicited) rating, which apparently sits on the back of "exceptional monetary flexibility". However, the negative outlook is retained as the sustainability of the recovery - built on private consumption and property investment - is of questionable sustainability.

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