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.