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
Stabilization 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.
