DBRS confirms AAA for EU, ‘stable’ trend
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.