S&P just affirmed the European Union’s AAA rating. However, the outlook is negative.
This comes a week after S&P downgraded nine eurozone countries, including France and Austria.
On Monday, S&P also downgraded the European Financial Stability Facility (aka the bailout fund) from AAA to AA+. It’s outlook is ‘developing’.
The downgrades did not have a negative impact on the markets. In fact, the S&P 500 actually climbed 1.7% this week.
On January 6, S&P’s Jean-Michel Six suggested that the market’s would not react significantly if France lost it’s AAA rating. It seems he was right.
Here’s S&P full press release:
Supranational European Union Ratings Affirmed At ‘AAA/A-1+’; Outlook Negative
Publication date: 20-Jan-2012 18:11:27 EST
- In our opinion, the supranational entity known as the European Union (EU) benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness.
- We are therefore affirming the long- and short-term issuer credit ratings on the EU at ‘AAA/A-1+’.
- The ratings on the EU are separate to those on the member states (the EU-27) and are not a cap on any member state’s ratings.
- We are removing the long-term issuer credit rating on the EU from CreditWatch negative, were it was placed on Dec. 7, 2011.
- The outlook is negative, in part reflecting the negative outlooks on 16 of the 27 member states of the EU.
LONDON (Standard & Poor’s) Jan. 20, 2012– Standard & Poor’s Ratings Services said today that it affirmed its ‘AAA’ long-term issuer credit rating on the European Union (EU). The outlook is negative. At the same time we removed the long-term rating from CreditWatch negative, where it was placed on Dec. 7, 2011. We also affirmed the ‘A-1+’ short-term issuer credit rating. The ratings on the EU are separate to those on the member states (the EU-27) and are not a cap on any member state’s ratings.
The EU is a supranational entity founded in 1958 by the Treaty Establishing the European Community (the Treaty of Rome). The EU and European Atomic Energy Community (EURATOM) borrow on the capital markets under a joint €80 billion euro medium-term note (EMTN) program for the purpose of providing loans or credit lines to member states–including eurozone members experiencing what the Council considers to be severe economic or financial disturbances caused by exceptional occurrences beyond a member’s control.
During 2011, eurozone member states accounted for 62% of the EU’s total budgeted revenues; budgeted revenues from Germany and France were 30% of total EU revenues, at 16% and 14%, respectively. On Jan. 13, 2012, we lowered the ‘AAA’ long-term sovereign credit rating on France and Austria by one notch to ‘AA+’, and affirmed the long-term rating on Germany at ‘AAA’. As a consequence of the Jan. 13 downgrades, the pool of ‘AAA’ member states contributing to the EU’s revenues has declined to 33% of 2011 budgeted revenues, from 49%. Nevertheless, in our opinion, the supranational entity known as the EU benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness. We are therefore affirming the long- and short-term issuer credit ratings on the EU at ‘AAA/A-1+’.
The EU has lent €43.4 billion (as of Jan. 16, 2012), mostly to eurozone member states under the European Financial stabilisation Mechanism (EFSM). Its largest exposures are currently to Ireland (€15.4 billion, BBB+/Negative/A-2) and Portugal (€15.6 billion, BB/Negative/B).
The EU also borrows to fund lending to non-eurozone member states under its Balance of Payments (BoP) program (€11.4 billion: Romania (BB+/Negative/B) €5 billion; Hungary (BB+/Negative/B) €3.5 billion; and Latvia (BB+/Positive/B) €2.9 billion. It also borrows to fund lending to the macro-financial assistance (MFA) program (€0.6 billion), and for EURATOM-related lending (€0.4 billion). In addition, the EU is an important guarantor for the European Investment Bank (€22.4 billion, AAA/Negative/A-1+). We understand the EU has no loan exposure to Greece (CC/Negative/C). These advances are funded by matching EU borrowings under its €80 billion EMTN program, which has scope for further increases without Council decision, if necessary.
EU revenues consist primarily of member states’ gross national income (GNI) contributions and also VAT-based revenues from member states. Timing differences between revenues received and disbursed results in cash balances (held on EU accounts at national treasuries and national central banks), which averaged €8.2 billion in 2011, and which can be used, if necessary, for EU debt service.
In addition, in order to compensate for revenue shortfalls, due to unexpected declines in GNI or other reasons, or to face debt service if a borrowing government defaults to the EU, the EU can call on member governments up to 1.23% of GNI (known as the “own resources ceiling”). The difference between 1.23% of GNI and the annual ceiling in payments, which averages 1.07% of GNI between 2007 and 2013, constitutes the EU’s “headroom” or callable funds, which would not require the appropriation of funds from member states. The headroom was approximately €30 billion at year-end 2011. It compares with an estimated €1.4 billion of capital and interest payments coming due in 2012. We expect this amount to rise to more than €9 billion by 2015.
To the extent that headroom exists, our rating on the EU factors in not only our view of its high franchise value as the central fiscal body for the EU member states, and its balance sheet characteristics, but also the potential source of additional resources from members. The EU currently has four ‘AAA’ rated members with stable outlooks (Denmark, Germany, Sweden, and the U.K.) and three ‘AAA’ members with negative outlooks (Finland, Luxembourg, and the Netherlands). Together, these seven member states represent 33% of EU revenues for 2011.
One of the EU’s balance sheet characteristics is the quality of its loan portfolio. We expect that member states that borrow from the EU would service their debt to the EU before servicing commercial or bilateral debt. We note, however, that as the proportion of official debt increases in relation to a borrowing government’s total debt stock, the senior position of privileged creditors is diluted.
The negative outlook reflects our view of what we see as the ongoing risks, at the eurozone level, to the creditworthiness of EU member states and therefore the supranational entity of the EU itself. The outlook is in line with the negative outlooks on 16 of the 27 member states. We could lower the ratings on the EU if the number of ‘AAA’ rated member states decreases, or if the EU’s headroom decreases compared with its annual debt service, or if member states default on payment obligations to the EU.