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Rating Action:

Moody's affirms European Union's Aaa rating and maintains stable outlook

24 Jun 2016

London, 24 June 2016 -- Moody's Investors Service ("Moody's") has today affirmed the European Union's long-term Aaa issuer rating, the short term (P)P-1 rating and maintained the stable outlook.

The rating action reflects our view that the EU's Aaa rating rests principally on the credit strength of its most highly rated members, and on their commitment to ensuring the continued soundness of its finances, underpinned by the joint and several obligations each EU member assumes to provide it with financial support where needed. Moody's does not expect that the UK's vote to leave and its eventual exit will alter either the capacity or the willingness of those very highly rated members to continue to honour their obligations to support the EU.

The two key drivers of the rating action are as follows:

1. The resilience of the credit standing of the EU's remaining highly-rated member states, which ultimately back the debt repayment capacity of the EU through a joint and several obligation enshrined in the EU treaty, and the low probability that their commitment to the EU will diminish.

2. The strength of the EU's debt repayment capacity provided by the union's conservative budget management, its favourable debt structure, ability to reallocate its large budgetary resources in case of need, and the ability to tap buffers under unforeseen circumstances.

Concurrently, Moody's has affirmed European Atomic Energy Community's (Euratom) and the European Coal and Steel Community's (ECSC) Aaa/(P)Prime-1 ratings and maintained their stable outlooks. The European Commission is also empowered to borrow on behalf of Euratom and its key credit characteristics are identical to the EU's, particularly the backing of the EU's budgetary resources and the European Commission's right to call for additional resources from member states if needed. Hence, Euratom's ratings tend to move in line with the EU's. The ECSC has been in liquidation since 2001, but still has some outstanding bonds that expire in 2019.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION

The first driver of the rating action is the resilient creditworthiness of the EU's 27 remaining member states, as reflected in the weighted median member rating of Aa2. Excluding the UK, approximately 64% of the total contributions to the EU budget come from members that are rated between the Aaa and Aa3 range and include Germany (Aaa stable), France (Aa2 stable), the Netherlands (Aaa stable), Belgium (Aa3 stable) and Luxembourg (Aaa stable). Moreover, around 96% of the total contributions to the EU budget now come from countries with a stable or positive outlook, indicating the resilience of member support.

Relatedly, today's rating affirmation reflects the value the EU derives from the obligations of EU member states to provide financial support in case of need, a key consideration underpinning the EU's credit profile, which will not be affected by the UK's decision to exit the union. This is enshrined in Articles 310 and 323, of the Treaty on the Functioning of the EU (EU Treaty) which imposes what Moody's interprets as a joint and several obligation on member states to provide funding to meet all of the EU's obligations in respect of third parties. Therefore, even in the event of one or two additional departures, the EU's finances would remain secured and ultimately fully protected by the joint and several obligations of the union's strongest members.

The second driver supporting the affirmation is the EU's conservative budget management and in particular the multi-layered debt-service protection which will continue to underpin the EU's debt repayment capacity despite a UK exit. The EU Treaty requires the EU to balance its budget, prohibiting any borrowing to cover budgetary shortfalls. The European Commission is permitted to borrow on behalf of the EU, which issues debt to lend to borrowing countries under the European Financial Stabilisation Mechanism (EFSM), the Balance of Payments Assistance (BoP) and the Macro Financial Assistance (MFA). The EU's outstanding debt is low and standing at around 49% of total budgetary revenues in 2015 (when UK contributions are excluded) and its ability to service that debt is supported by various institutional layers of protection.

First, although all borrowing is fully guaranteed by the EU budget, any debt service needs are met using the proceeds of repayments by borrowing countries. At present, 87% of the EU's total outstanding debt has been lent to Portugal (Ba1 stable) and Ireland (A3 positive).

Secondly, the EU has the flexibility to redirect budget expenditures to cover debt service if required. While its maturing debt is expected to increase from EUR2.6 billion in 2017 to EUR11 billion in 2021, those numbers are small when compared with EUR143 billion in payment appropriations.

And finally, the EU has contingent claims on member states of about EUR40 billion annually (0.23% of EU GNI) over the 2014-2020 MFF period (the member states' aforementioned joint and several obligations). These represent a powerful buffer for unforeseen expenses, particularly since available on a joint and several basis, so claims do not have to be made in accordance with contribution key. While the contingent claim buffer will fall to around EUR34 billion a year (0.278% of EU GNI, excluding UK) following the UK's exit, it will remain ample to cover the EU's current debt-servicing requirements.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the rating balances the EU's current fiscal and financial framework with the increased but still low risk of further departures from the union in the future. While the UK's exit may lead to increased policy tensions within and among other EU members and raises somewhat the probability of further departures, Moody's base case is that that it will not happen. Furthermore, even the departure of one or more smaller and less creditworthy members would not erode the credit strength of the EU which principally reflects the support derived from its largest, most creditworthy members. Although the UK's decision to leave increases the risk of this happening, the likelihood of a highly rated member leaving is very low, thus leaving the debt repayment capacity of the EU insulated by the joint and several obligation of its strongest members.

WHAT COULD CHANGE THE RATING DOWN

Any apparent weakening in the commitment of those highly rated member states to the EU, including increased likelihood of further countries leaving following the UK exit would be credit negative, as would changes to the EU's fiscal framework that would lead to less conservative budget management. If the joint and several feature of the obligations of member countries vis-a-vis EU obligations are assessed to be weaker than previously anticipated, that will pose downward pressure on the rating. Other risks include a deterioration in the creditworthiness of its member states. The EU's rating is particularly sensitive to changes in the ratings of the three countries rated Aaa to Aa2 that make large contributions to the EU budget, i.e., Germany, France, and the Netherlands.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: European Union

....LT Issuer Rating, Affirmed Aaa

....Senior Unsecured Regular Bond/Debenture, Affirmed Aaa

....Senior Unsecured Medium-Term Note, Affirmed (P)Aaa

....Other Short Term, Affirmed (P)P-1

..Issuer: European Atomic Energy Community

....LT Issuer Rating, Affirmed Aaa

....Senior Unsecured Regular Bond/Debenture, Affirmed Aaa

....Senior Unsecured Medium-Term Note, Affirmed (P)Aaa

....Other Short Term, Affirmed (P)P-1

..Issuer: European Coal and Steel Community

....LT Issuer Rating, Affirmed Aaa

....Senior Unsecured Regular Bond/Debenture, Affirmed Aaa

....Senior Unsecured Medium-Term Note, Affirmed (P)Aaa

...Other Short Term, Affirmed (P)P-1

Outlook Actions:

..Issuer: European Union

....Outlook, Remains Stable

..Issuer: European Atomic Energy Community

....Outlook, Remains Stable

..Issuer: European Coal and Steel Community

....Outlook, Remains Stable

The UK's vote to leave the EU required the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

Specific economic indicators as required by EU regulation are not applicable for these entities.

On 24 June 2016, a rating committee was called to discuss the rating of the European Union. The main points raised during the discussion were: The issuer's liquidity assessment and shareholder support is assessed to be broadly maintained after the UK vote to exit the European Union.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alpona Banerji
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms European Union's Aaa rating and maintains stable outlook
No Related Data.
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