EU loses AAA rating at S&P as states’ creditworthiness falls

December 20, 2013 03:42 AM

The European Union lost its top credit rating from Standard & Poor’s, which cited the deteriorating creditworthiness of the bloc’s 28 member nations.

S&P cut its long-term rating on the EU to AA+, with a stable outlook, from AAA and maintained its short-term rating at A-1+. The downgrade came after S&P last month lowered its AAA rating on the Netherlands.

Investors often ignore ratings, as evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011. Yields on sovereign securities last year moved in the opposite direction from what ratings suggested in more than half of 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg.

The downgrade “changes nothing,” President Francois Hollande of France, Europe’s second-largest economy, told reporters today after a summit of European leaders in Brussels.

Global bond yields showed investors ignored 50% of S&P’s rating and outlook changes last year, and 56% of those from Moody’s Investors Service, more often disagreeing when the ratings companies said governments were becoming safer or more risky, data compiled by Bloomberg show.

On the EU, S&P said that “downward pressure could build” if the creditworthiness of highly rated EU countries “was to deteriorate beyond our current expectations,” if future budget negotiations are “more protracted and acrimonious,” if member states apply to leave the EU, “or if its financial parameters markedly deteriorate,” according to an e-mailed statement.

Under Pressure

Ratings remain under pressure more than four years after the outbreak of the European debt crisis, which led the EU to offer emergency financing to Greece, Ireland, Portugal, Spain and Cyprus to shore up their bonds and banks. European Central Bank President Mario Draghi’s pledge to do what it takes to save the euro has helped stabilize debt markets, while deficits and debt in most euro-area countries remain well above the limits set for membership in the single currency.

The euro was down 0.1% against the U.S. dollar, trading at $1.3653 at 2:05 p.m. in London, off its session low of $1.3625.

“It seems to have been a short-term negative for the euro,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “That said, the times when ratings downgrades had a lasting impact on foreign-exchange rates seem to be a thing of the past.”

EU Budget

The EU budget is financed by contributions from the 28 member states and not EU-wide bond sales, and its credit rating is based on the perceived sovereignty of its members. There is little risk that the EU will not be able to access capital markets, S&P said.

A lack of cohesion and solidarity among EU member states, particularly regarding the budget process, poses a credit risk, S&P said in today’s statement.

“EU budgetary negotiations have become more contentious, signaling what we consider to be rising risks to the support of the EU from some member states,” the ratings company said.

The European Commission, the EU executive in Brussels, “disagrees with S&P that Member State obligations to the budget in a stress scenario are questionable,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement. “The commission underlines that the EU rating with the two other major rating agencies, Fitch and Moody’s, is AAA.”

The EU countries that make the biggest contributions to the bloc’s budget have been pushing for reductions in their shares, while the U.K. plans a referendum on whether to remain a member of the bloc.

This is “the first time in the EU’s history that a sitting government has proposed such a step,” S&P said. “Although this potential plebiscite is set for 2017, the U.K. general elections are expected in 2015 and we expect EU membership to be a key debate.”

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