EU outlook revised to “negative” from “stable” by Standard & Poor’s

 
James Nickerson
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S&P think the EU’s AA+ credit rating has a greater than 1-in-3 change of being cut in the next 2 years (Source: Getty)

Standard and Poor’s has revised the EU’s outlook to negative due to the ongoing Greek debt crisis and growing fears that the UK could vote to leave the EU.

The decision also reflects that S&P believe the EU’s AA+ credit rating has a greater than 1-in-3 change of being cut in the next 2 years. This credit rating applies the organisation comprising all 28 member states of the EU, not just the 19 that use the euro.

Read more: UK outlook slashed to negative by Standard & Poor's over EU referendum risk

In a statement, S&P said the outlook reflects the following three points:

  • Our expectation that the EU will provide first-loss guarantee support for financing connected to the Juncker Plan;
  • Further downward pressure on the average weighted rating on net budgetary contributors to the EU, as indicated by our negative outlooks on the second- and third-most important sovereign contributors, the U.K. and France (Germany is the largest contributor); and
  • The EU's repeated use of its balance sheet to provide higher-risk financing to EU member states (most recently including Greece), without the member states' paying in capital.

Read more: Brexit could "significantly dent" UK financial services and insurance sectors

Since S&P last reviewed the EU's rating, they revised their outlook for the UK to negative, reflecting concerns about a referendum to exit the EU.

The negative rating on the EU also reflects its lack of any paid-in capital, “a key difference compared with other multilateral institutions,” S&P said in their statement.

“The EU continues to run a very large negative net asset position, largely reflecting its considerable pension obligations,” S&P added.

While they have taken positive rating actions with seven of the 28 member states since the rating was cut to AA+, the two negative on France and UK have a larger impact as they are the second and third largest net contributors to the EU budget:

Together, France and the U.K. make up 31 per cent of EU GDP and an estimated 39 per cent of net EU budgetary contributions. An upgrade of The Netherlands, for instance, would not neutralize the effect of lower ratings on either the U.K. or France, given that The Netherlands accounts for only 6 per cent of total net contributions to the budget.

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