Frankfurt am Main, September 14, 2018 -- Moody's Investors Service has today affirmed the European Union's (EU)
long-term Aaa issuer rating, the Aaa senior unsecured ratings,
the (P)Aaa senior unsecured MTN rating and the short term (P)P-1
rating and maintained the stable outlook.
The decision to affirm the rating reflects the following key rating factors:
(1) the very high strength of member support reflecting the significant
credit strength of its most highly rated members and their commitment
to ensure the continued soundness of the EU's finances;
(2) the EU's conservative budget management, and multiple
layers of debt-service protection, including the potential
recourse to additional member support on a timely basis if and when needed.
The stable outlook reflects the EU's very strong credit metrics,
such as the relatively low level of outstanding debt when compared to
annual budget revenues, and Moody's view that the EU's
creditworthiness will be able to withstand any negative effects of the
UK's exit from the EU.
Concurrently, Moody's has affirmed the 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. While Euratom and
the ECSC are separate legal entities, their key credit characteristics
are identical to the EU's. The European Commission (EC) borrows
on behalf of Euratom and any debt repayment obligations are backed by
the EU's budgetary resources and the EC's right to call for additional
resources from member states if needed. The same applies for ECSC
which has been in liquidation since 2001, but has some outstanding
bonds that expire in 2019. Hence, both entities' ratings
move in line with the EU's.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
FIRST DRIVER: VERY STRONG MEMBER SUPPORT AND THE SIGNIFICANT CREDIT
STRENGTH OF THE EU'S MOST HIGHLY RATED MEMBERS
The first driver of the Aaa rating affirmation is the very high strength
of member support and the significant credit strength of the EU's
most highly rated members, committed to ensure the continued soundness
of its finances. Moreover, Moody's notes improvements
in EU member states creditworthiness. Since Moody's last
rating action on the EU on 24 June 2016, the sovereign ratings of
six member states have been upgraded; Ireland (A2 stable),
Spain (Baa1 stable), Slovenia (Baa1 stable), Hungary (Baa3
stable), Cyprus (Ba2 stable) and Greece (B3 positive), whereas
only one member state's sovereign rating has been downgraded,
the United Kingdom (Aa2 stable). Similarly, outlooks on the
sovereign ratings of nine EU member states have improved, compared
to a deterioration in rating outlooks for four EU member states.
Of particular importance, France, a key founding member and
among the highly rated members now has a positive outlook on its Aa2 rating.
Approximately 30% of the total contributions (value-added
tax (VAT)- and gross national income (GNI)-based,
and traditional own resources) to the EU budget in 2018 come from members
that are rated Aaa. Moreover, almost 66% of the total
contributions to the EU budget come from members rated between Aaa and
Aa3. This range includes among others, Germany (Aaa stable),
the Netherlands (Aaa stable), Luxembourg (Aaa stable), France
(Aa2 positive), and Belgium (Aa3 stable). Around 89%
of the total contributions to the EU budget now come from countries with
a stable or positive outlook, indicating in Moody's view the
further improved resilience of member support.
SECOND DRIVER: CONSERVATIVE BUDGET MANAGEMENT AND MULTIPLE LAYERS
OF DEBT-SERVICE PROTECTION
The second driver of the Aaa rating affirmation relates to the EU's conservative
budget management and multiple layers of debt-service protection.
Moody's views the EU's budget management as very conservative.
According to Article 310 of the EU Treaty it must produce a balanced budget.
The EU's borrowing for off-budgetary purposes carries multiple
layers of debt-service protection, including: (1) back-to-back
financing of loans extended to borrowers, with any debt service
needs to be met using the proceeds of repayments by borrowing countries;
(2) the EU's consistently strong cash balances that easily cover
debt payment obligations even at their peak; (3) the flexibility
to redirect around a third of budget expenditures (e.g.
structural funds) to cover debt service if required; and (4) the
margin between the maximum contributions by the member states and the
actual resources that the EU requests from them, which constitute
a significant additional buffer of resources that the EU can draw upon,
in 2018 amounting to 0.22% of GNI or around €35 billion.
The EU's outstanding debt amounts to €52.8 billion as
at end-August 2018, down from €54 billion at year-end
2017, and compared to a peak of €57.4 billion at the
end of 2014. The EU borrows to on-lend to its member states
through the European Financial Stabilisation Mechanism (EFSM) and Balance-of-Payments
(BoP) financial assistance programmes, or to non-EU neighbouring
countries through its Macro-Financial Assistance (MFA).
Out of the total outstanding debt, the bulk (€46.8 billion)
is related to financial assistance to Ireland and Portugal under the EFSM,
for which the last repayments will fall due only in 2042, and maturities
could be extended even further.
In particular, strong cash balances represent one of the EU's
layers of protection. As of August 2018, the EU's treasury
cash balance stood at €22.9 billion, and since July
2016 the monthly cash balance has not fallen below €10.9 billion,
fully covering the EU's maturity repayment (includes capital and interest)
peak year of 2021 of close to €10.9 billion. An additional
layer of safety is that the EU has the flexibility to redirect part of
the budget expenditures, amounting to around €50 billion (e.g.
structural funds) to cover debt service if required.
According to Article 14 of the Council Regulation (EU, Euratom)
No. 609/2014 that describes the measures to meet the EU's
cash requirements, the EC has the legal right to draw on all member
states in the event a borrowing country fails to repay its loan to the
EU on time and that the EU's available cash resources are insufficient
to cover debt service payments. In such an adverse event,
according to Article 14 (4), the additionally required funds "shall
be divided among the Member States, as far as possible, in
proportion to the estimated budget revenue from each of them".
Additional supportive EU debt protection legislation includes Article
323 of the EU Treaty (Treaty on the Functioning of the European Union),
2016/C 202/1 which states that "the European Parliament, the
Council and the Commission shall ensure that the financial means are made
available to allow the Union to fulfil its legal obligations in respect
of third parties." Moody's interprets this article
such that EU member states are obliged to provide funds, potentially
above and beyond their budgetary obligations, to meet all of the
EU's obligations in respect to third parties.
Together, these protections are in Moody's view equivalent
to a joint and several support framework.
Moody's also takes comfort from the timeliness of any additional
contributions to be paid by the member states in case of need.
According to Article 15 (1) of the above-mentioned Council Regulation
the member states shall execute the EC's payment orders following the
Commission's instructions and "within not more than three working
days of receipt". Few other supranational entities and multilateral
development banks have such clear and timely payment requirements.
RATIONALE FOR THE STABLE OUTLOOK
Moody's expects the EU's credit profile to remain very strongly
supported by the current fiscal and financial framework, which is
also reflected in very strong credit metrics. Despite the UK's
exit from the EU planned to take place at the end of March 2019,
Moody's does not expect that this will negatively affect either
the capacity or the willingness of highly rated members to honour their
obligations to the EU.
Although the UK is one of the key net contributors to the EU budget (12.5%
of total contributions in 2018), its exit is not expected to have
an impact on the EU's rating. According to the Draft Agreement
on the withdrawal, the UK will contribute to the EU budget until
2020. The gap left in the EU's budget due to Brexit could
be filled by the 27 remaining EU member states, budget cuts or a
combination of both aforementioned measures. Excluding the UK's
share, the cash balance, the budgetary resources as well as
the margin to the own resources ceiling that the EU can call upon remain
very significant layers of protection for the EU to fulfill its debt service
obligations.
WHAT COULD CHANGE THE RATING - DOWN
Any potential weakening in the commitment of highly rated member states
to the EU, or in the commitment of the EU's highly rated members
to provide regular payments to the EU budget as well as extraordinary
support, would lead to downward pressure on the Aaa stable rating,
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-à-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 highly-rated EU members.
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
Programme, 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
Programme, 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
Programme, 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
Specific economic indicators as required by EU regulation are not applicable
for these entities.
On 11 September 2018, 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 have not materially changed. The issuer continues to enjoy
multiple strong layers of debt-service protection.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in March 2017.
Please see the Rating 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.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
