03 September 2012

Moody's maintains the European Union's Aaa rating, changes outlook to negative

A provisional rating for a debt facility is an indication of the rating Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance. Moody's policy is to assign provisional ratings to all MTN programmes.

The outlook change to negative reflects the negative outlooks now assigned to the Aaa sovereign ratings of key contributors to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45 per cent of the EU's budget revenue. Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key Member States considering the significant linkages between Member States and the EU, and the likelihood that the large Aaa-rated Member States would likely not prioritise their commitment to backstop the EU debt obligations over servicing their own debt obligations. On 23 July 2012, Moody's had changed to negative its outlooks for the Aaa ratings of Germany and the Netherlands.

The Aaa long-term issuer rating, the provisional (P)Aaa long-term rating and the provisional (P)Prime-1 short-term issuer rating for the EU's debt issuance programmes as well as the Aaa-ratings on existing EU issuances remain unchanged. This is because Moody's two key rationales for assigning a Aaa to the EU remain in place, namely: 1) the EU's conservative budget management, and 2) the creditworthiness and support provided by its 27 Member States.

The European Commission is empowered to borrow on behalf of the EU, which issues debt to lend to borrowing countries under the European Financial Stabilisation Mechanism, the Balance of Payments Assistance and the Macro Financial Assistance. The EU is also a guarantor for certain external lending by the European Investment Bank (EIB, Aaa stable).

Many of the considerations driving the change to the EU's rating outlook -- in particular the weakening of the creditworthiness of key Aaa-rated Member States -- are also relevant to the credit standing of other European supranational debt-issuing entities, such as the EIB, the European Investment Fund (Aaa stable), the Council of Europe Development Bank (Aaa stable) and the European Bank for Reconstruction and Development (Aaa stable). However, these entities are Multilateral Development Banks (MDBs) with significant amounts of paid-in capital, accumulated reserves, and highly diversified credit portfolios, which differentiates them from the EU. Following today's rating action on the EU and Euratom, Moody's will assess to what extent the credit-enhancing features of MDBs are sufficient to mitigate the impact of the weakening of the creditworthiness of key Aaa-rated Member States on those MDBs' credit standing.

Press release

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