Credit ratings agency Moody’s last week downgraded the long-term issuer outlook for the European Union from stable to negative, but retained its AAA rating.
The ratings agency says the move reflects negative outlooks assigned to Aaa-rated key contributors to the EU including Germany, France, the UK and the Netherlands. The four account for 45 per cent of the EU’s budget revenue.
The agency reports: “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.
“The creditworthiness of these member states is highly correlated, as they are all exposed, albeit to varying degrees, to the euro area debt crisis.”
Moody’s says although there are structural features to enhance the EU’s creditworthiness, they are not sufficient to delink the EU’s ratings from key member states.
In the event of extreme stress leading to a default by AAA-rated members, the agency believes defaults on the loans backing EU debt would be highly likely, the cash reserve would be stressed, and member states would not be likely to prioritise their commitment to backstop the EU debt obligations over the service of their own debt obligations.
The report adds:“Hence, it is reasonable to assume that the EU’s creditworthiness should move in line with the creditworthiness of its strongest key member states.”