Robust support and capital base underpin ESM’s creditworthiness
The European Stability Mechanism (ESM) Aa1/Prime-1 ratings are underpinned by the very strong political and financial support the entity receives from its euro area shareholders as well as the entity’s large capital cushion, Moody’s Investors Service said in a report.
In particular, the rating agency highlights that the ESM has a large (paid-in) capital base and a strong mechanism in place to call substantial additional capital contributions from its shareholders in case of need.
The creditworthiness of the ESM’s shareholders is high (weighted median rating of Aa1), which provides very high assurance that a capital call will be honoured and further support provided in the very unlikely event it is needed. A further credit strength is the ESM’s low leverage, which would remain moderate even in a situation of full usage of its lending capacity. The entity’s liquidity and capital management policies are prudent and ensure that the ESM will not face a liquidity shortfall in case a borrower defaults.
That said, Moody’s cautions that the ESM’s creditworthiness is more closely correlated with its key shareholders than is the case for most other supranational entities, given the close economic and financial linkages in the euro area. Due to its policy mandate to support euro area sovereigns in financial distress, the ESM tends to have a highly concentrated loan book and high embedded credit risk. Moody’s also believes that the default correlation between member states of the monetary union remains high, even though the acute phase of the euro area crisis has passed.