DBRS con­firms AAA for EU, ‘sta­ble’ trend

Financial Mirror (Cyprus) - - FRONT PAGE -

DBRS Rat­ings has con­firmed the long-term is­suer rat­ing of the Euro­pean Union at AAA and the short-term is­suer-rat­ing at R-1 (high), with the trend on both rat­ings as ‘sta­ble’.

DBRS rates the EU AAA pri­mar­ily on the ba­sis of its Support As­sess­ment, in which the credit rat­ings of the EU’s core mem­ber states is the pri­mary fac­tor, say­ing that the rat­ings are un­der­pinned by the cred­it­wor­thi­ness of the EU’s core mem­ber states and their col­lec­tive com­mit­ment to support the EU’s abil­ity to re­pay its debt.

The ‘sta­ble’ trend re­flects the DBRS view that the near-term risks to the EU’s rat­ings are low. How­ever, mul­ti­ple notch down­grades of EU core mem­ber states could put down­ward pres­sure on the EU’s rat­ings, par­tic­u­larly if the credit de­te­ri­o­ra­tion is the re­sult of de­te­ri­o­ra­tion in the co­he­sion of the EU, or a weak­en­ing of the po­lit­i­cal com­mit­ment of core EU mem­ber states and bor­row­ers.

DBRS be­lieves that EU mem­ber states have con­sis­tently shown strong com­mit­ment to support its key func­tions, as demon­strated through the ac­ti­va­tion of a num­ber of fi­nan­cial support mech­a­nisms used in re­sponse to the fi­nan­cial cri­sis, as well as through funds that mem­ber states con­tinue to con­trib­ute to the EU bud­get.

More­over, EU mem­ber states share joint re­spon­si­bil­ity to pro­vide the fi­nan­cial re­sources re­quired to ser­vice the EU’s debt. In this con­text, the EU’s rat­ing is par­tic­u­larly sen­si­tive to changes in the rat­ings of the four coun­tries with the largest con­tri­bu­tions to the EU bud­get, i.e., Ger­many (for­eign cur­rency rat­ing of AAA Sta­ble), France (AAA Neg­a­tive), the U.K. (AAA Sta­ble) and Italy (A low Neg­a­tive). Be­cause Ger­many, France and the UK ac­count for 50% of the bud­get rev­enues, the weighted me­dian rat­ing of the core mem­bers is AAA.

DBRS said that a one-notch down­grade of any sin­gle core mem­ber state is un­likely to re­sult in a down­grade of the EU rat­ings. How­ever, the EU rat­ings could be low­ered if sev­eral core mem­ber states ex­pe­ri­ence rat­ings down­grades, or if there is a marked de­te­ri­o­ra­tion in the cred­it­wor­thi­ness of a sin­gle AAA-rated core mem­ber state.

The EU is­sues debt to pro­vide loans to sov­er­eigns fac­ing fi­nan­cial dif­fi­cul­ties un­der three pro­grammes: the Euro­pean Fi­nan­cial Sta­bil­i­sa­tion Mech­a­nism (EFSM) loans avail­able to all EU mem­ber states; Bal­ance of Pay­ment (BoP) loans ded­i­cated to EU mem­ber states out­side the euro area fac­ing ex­ter­nal dif­fi­cul­ties; and Macro-Fi­nan­cial As­sis­tance (MFA) loans avail­able for non-EU mem­ber states. In ad­di­tion, the Com­mis­sion is­sues bonds on be­half of the Euro­pean Atomic En­ergy Com­mu­nity (EURATOM) which are also backed by the EU bud­get, and the EU also as­sumes the sov­er­eign risk of loans granted by the Euro­pean In­vest­ment Bank (EIB) to coun­tries out­side the EU, which is backed by an in­ter­nal guar­an­tee fund and the EU bud­get.

Loans out­stand­ing have in­creased sig­nif­i­cantly since 2011, reach­ing EUR 57 bln in De­cem­ber 2014, from EUR 13 bln in 2010, with the EU’s debt-to-rev­enue ra­tio in­creas­ing to 41% from 10%, re­spec­tively. This rise is mostly at­trib­ut­able to the EFSM pro­gramme, un­der which loans to Ire­land (A low, Pos­i­tive) and Por­tu­gal (BBB low, Sta­ble) of EUR 46.8 bln ac­count for 76% of to­tal loans out­stand­ing.

Over the medium term, DBRS ex­pects EU debt to de­cline, with the EFSM no longer en­gaged in new lend­ing pro­grammes. Nev­er­the­less, DBRS ex­pects the EU to re­main ac­tive in cap­i­tal mar­kets un­til at least 2026, due to the po­ten­tial length­en­ing of loan ma­tu­ri­ties fol­low­ing the in­crease in the max­i­mum av­er­age ma­tu­ri­ties of EFSM loans to Ire­land and Por­tu­gal.

The EU’s planned in­vest­ment plan, an­nounced in Novem­ber 2014 and aimed at boost­ing in­vest­ments by EUR 315 bln in 20152017, is not ex­pected to add ad­di­tional fi­nanc­ing com­mit­ments for the EU, DBRS said.

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