S&P spoils the show at EU leaders’ summit

  

Standard & Poor's cut its long-term credit rating on the European Union budget to AA-plus from AAA on Friday (20 December), dealing a blow to EU leaders who had congratulated themselves the day before for agreeing the last elements of their banking union plans.

S&P cited rising tensions on EU budget negotiations to explain its move, which follows cuts to the ratings of several EU member states in recent months.

"In our opinion, the overall creditworthiness of the now 28 EU member states has declined," S&P said in a statement.

"In our view, EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states."

S&P said cohesion among EU members had lessened and that some might baulk at funding the EU budget on a pro-rata basis.

The rating agency expressed concerns about the commitment of some member states to continue funding their portion of the budget pro-rata. Later in the statement it mentioned the UK, which had fought to keep the EU budget down, although it never suggested it may not pay its portion.

S&P has had a negative outlook on the EU since January 2012 and has since cut its ratings on members countries France, Italy, Spain, Malta, Slovenia, Cyprus and The Netherlands.

The credit-rating agency said its downgrade of The Netherlands last month left the EU with six 'AAA'-rated members. Since 2007, revenues contributed by 'AAA'-rated sovereigns as a proportion of total EU revenues nearly halved to 31.6%, it added.

Limited significance

The announcement by S&P came as EU leaders meeting in Brussels hailed an agreement on a pan-European banking union, the final details of which were ironed out by finance ministers meeting the day before.

However, unlike the downgrading of France in 2012, which was felt like a trauma and whose impact on interest rates was obvious, the European Union's downgrade has less significance.

Indeed, the European Union does not have the ability to issue sovereign debt as countries can do to finance their budget. It only borrows in its own name on an exceptional and strictly regulated basis, primarily as part of the European Stability Mechanism, which lends money to countries in difficulty. Ireland and Portugal have borrowed from that fund up to €22.5 and €26 billion respectively.

The European Commission may also lend money to non-EU countries but only for relatively small amounts. It is this mechanism that could have been used to lend money to Ukraine.

The S&P degradation is therefore more symbolic than anything else, and mainly reflects the worsening financial health of its member countries, which is not a surprise.

The EU currently has outstanding loans of €56 billion, according to S&P.

Positions: 

The European Commission reacted to the announcement by underlining that the EU rating with the two other major rating agencies Fitch and Moody's remained stable, at AAA.

“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 (without deficit or debt), the very strong budget revenues from EU Own Resources and the Treaty obligation from the 28 Member States to always balance the EU Budget,” the EU executive said in a statement.

“The Commission disagrees with S&P that MS obligations to the Budget in a stress scenario are questionable. All MS have always and also throughout the financial crisis provided their expected contributions to the budget in full and in time."

"We must put it in perspective," Belgian Prime Minister Elio di Rupo told reporters as he arrived for an EU summit in Brussels. "It's just an opinion."

Italian Prime Minister Enrico Letta said the decision should not be ignored and showed that Europe's economic crisis was not yet over.

Others were more withering in their reaction, questioning the expertise of S&P and other ratings agencies, which have been critical of the EU throughout a four-year debt crisis. "I've met some of the so-called experts from the ratings agencies and really you have to wonder. What have they got right?" asked one senior official with knowledge of the EU budgetary process, speaking on condition of anonymity.

"Two years ago they were saying Greece would end up leaving the euro zone. They were completely wrong. Shouldn't they have to acknowledge their mistakes?"

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Comments

Robert Christian's picture

What happens to the "EUSSR" when they lose the "united kingdoms" contributions,this neurozone gets worse day by day and will hopefully collapse in the near future.

Robert Christian's picture

What happens to the "EUSSR" when they lose the "united kingdoms" contributions,this neurozone gets worse day by day and will hopefully collapse in the near future.

Mike Parr's picture

This could be seen as a warning to the EU by one of the contributors to the 2007 finance collapse S&P rated CDO that had zero or negative value at AAA. Not unreasonably the EU would like to S&P and the others reformed (or indeed some more competition in this area). S&P would like to maintain the status quo (3 big ones and some small fish that don't count). Dawn raids on all three companies would focus minds - they almost certainly collude & finding evidence should not be difficult.

Mike Parr's picture

This could be seen as a warning to the EU by one of the contributors to the 2007 finance collapse S&P rated CDO that had zero or negative value at AAA. Not unreasonably the EU would like to S&P and the others reformed (or indeed some more competition in this area). S&P would like to maintain the status quo (3 big ones and some small fish that don't count). Dawn raids on all three companies would focus minds - they almost certainly collude & finding evidence should not be difficult.

Alberto Rodrigues 's picture

Eu banking problems must be solved not with artificials tricks but by economic viable projects For example if in any EU countries
For this purpose using my digital science economy skills and some of my researchers results
1) i had created a list of businesses which bring more than 25 % profits in less than 75 days Because of this a large number of investors which are leaving EU will be motivated to invest a part of their money in EU
2) Apart of this i have created a very genuine digital platform though what people will get cash money apart of their salary doing usefull things in it to bring investors and tourist to EU As the major condition to benefit from those advantages is to oppen a new banking account in an EU bank this will help EU banking to get billions of Euros
3)

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