Standard and Poor’s ratings agency downgraded the European Union’s long-term credit rating one notch to AA+.
The rating agency stripped the bloc’s top-level AAA long-term credit rating citing the overall weaker creditworthiness of the European Union’s 28 member states.
S&P cuts European Union’s rating to AA+
S&P cut its long-term ratings on the European Union to AA+, with a stable outlook from AAA. However, it maintained its short-term rating at A-1+. Last month S&P lowered its AAA rating on the Netherlands.
S&P said downward pressure could build on the European Union if the creditworthiness of highly-rated European Union countries was to deteriorate beyond the ratings agency’s current expectations. Further the ratings agency said the downward pressure could build if future budget negotiations are more protracted and acrimonious, if member states apply to leave the European Union or if its financial parameters markedly deteriorate.
In July, ratings agency Fitch downgraded France from the top AAA credit rating citing a heavier government debt load and poor prospects for growth. Last year S&P and Moody’s Corporation also downgraded France from the AAA club.
EU’s AAA ratings under review
David Jolly of the New York Times believes the downgrade appeared to have been mainly the outcome of a recalculation of average credit ratings in the European Union bloc. Since S&P put the European Union’s AAA rating under review in January 2012, it has cut ratings for the Netherlands, France, Italy, Spain, Malta, Slovenia and Cyprus. David believes this could be the main reason for the European Union bloc’s overall credit rating getting declined.
The European Union budget is financed by contributions from the 28 member states and its credit rating is based on the perceived sovereignty of its members. S&P said there is little risk that the European Union will not be able to access the capital market.
In today’s statement, the ratings agency indicated that a lack of cohesion and solidarity among European Union member states, particularly regarding the budget process, poses a credit risk. European Union budgetary negotiations have become more contentious, signaling what S&P considers to be rising risks to the support of the European Union from some member states.
However, the European Commission disagrees with S&P view that member state obligations to the budget in a stress scenario are questionable. In a statement, Olli Rehn, European Union Economic and Monetary Affairs Commissioner, said the commission underlines that the European Union rating with the two other major rating agencies – Fitch and Moody’s Corporation (NYSE:MCO) – is AAA.