S&P Downgrades European Union From AA+ To AA – Full Text
By Tyler Durden
First S&P downgraded the UK, now it’s the EU’s turn.
Long-Term Rating On Supranational Institution The European Union Lowered To ‘AA’ On Brexit Referendum; Outlook Stable
The European Union (EU) supranational borrows on the capital markets to lend to member states and certain other governments on a back-to-back basis. The long-term rating on the EU partly relies on the capacity and willingness of its 28 members to support it. We currently rate the EU at ‘AA’.) OVERVIEW
- After the decision by the U.K. electorate to leave the EU as a consequence of the June 23 consultative referendum, we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.
- We think that, going forward, revenue forecasting, long-term capital planning, and adjustments to key financial buffers of the EU will be subject to greater uncertainty.
- As a consequence, we are lowering our long-term rating on the supranational European Union to ‘AA’ from ‘AA+’ and affirming the ‘A-1+’ short-term rating.
- The outlook is stable, reflecting our opinion that under most scenarios, including a U.K. withdrawal from future (though not current) budgetary commitments, our anchor ratings on the EU will remain at the current level of ‘AA/A-1+’.
RATING ACTION
On June 30, 2016, S&P Global Ratings lowered its long-term issuer credit rating on supranational institution, the European Union (EU), to ‘AA’ from ‘AA+’. The ‘A-1+’ short-term rating was affirmed. The outlook is stable.
RATIONALE
The rating action stems from S&P Global Ratings’ view that the U.K. government’s declared intention to leave the union lessens the supranational’s fiscal flexibility, while reflecting weakening political cohesion. As a consequence of the decision by the U.K. electorate to leave the EU following the June 23 referendum, we have reassessed our previously favorable opinion of solidarity within the EU to neutral from positive. Our baseline scenario was previously that all 28 member states would remain inside the EU. While we expect the remaining 27 members to reaffirm their commitment to the union, we think the U.K.’s departure will inevitably require new and complicated negotiations on the next seven-year budgetary framework, known as the Multiannual Financial Framework (MFF), from 2021-2027. Going forward, revenue forecasting, long-term capital planning, and adjustments to key financial buffers of the EU will in our view be subject to greater uncertainty.
The long-term rating on the EU relies on the capacity and willingness of the 10 wealthiest EU members that are net contributors to the EU budget. We calculate the anchor rating on the EU by determining the GDP-weighted rating of these net contributors, which is now ‘AA’. We can modify this anchor rating up or down according to our assessment of:
- The EU’s fiscal flexibility;
- The EU’s large and underfunded pension and other employee liabilities of 58.6 billion as of end 2014 (2015 financial statements have yet to be released);
- The EU’s guarantees given or received;
- Our view of the permanence of the political cohesion in the EU, and the risks to …read more
Source: S&P Downgrades European Union From AA+ To AA – Full Text
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