Note: On June 14, 2022, the press release was corrected as follows: in the RATINGS RATIONALE section, the sentence relating to the Economic Data information was updated to read: “Specific economic indicators as required by EU regulation are not available for the EU”. Revised release follows.
Frankfurt am Main, September 18, 2020 -- Moody's Investors Service ("Moody's") 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 Aaa rating reflects the following key rating
factors:
(1) The very high commitment of EU members to ensuring the continued soundness
of the EU's finances and their very high capacity to do so given the significant
credit strength of the EU's most highly-rated members;
(2) The multiple layers of debt service protection, including explicit
recourse to extraordinary support which, in Moody's view,
creates the equivalent of a joint and several undertaking and obligation
on the part of EU member states to provide financial support to the EU.
The stable outlook reflects the strength of the safeguards in place to
secure the backing of the EU's member states -- and in particular
of its strongest members -- notwithstanding the material increase
in debt expected over the coming years. In addition, further
enhancements have been either implemented or proposed (and are expected
to be implemented) to existing financial safeguards in light of the significant
planned increase in EU borrowing in response to the coronavirus pandemic.
In Moody's view this means that the EU will always be in a position
to comfortably meet its debt repayment obligations notwithstanding the
envisaged sharp increase in EU borrowings over a relatively short period.
Concurrently, Moody's has affirmed the European Atomic Energy Community's
(Euratom) and the European Coal and Steel Community's (ECSC) long-term
Aaa issuer ratings, their (P)Aaa senior unsecured MTN and short
term (P)P-1 ratings, and also affirmed Euratom's Aaa
senior unsecured rating. The rating outlooks remain stable for
both entities. 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 and
its last outstanding bonds expired in 2019. Hence, both entities'
ratings move in line with the EU's.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
Recent and expected decisions regarding the EU's role in providing
financial support to EU member states hard hit by the coronavirus crisis
will increase the EU's debt obligations very significantly.
The EC has implemented one new debt-financed instrument (Support
to Mitigate Unemployment Risks in an Emergency, or 'SURE')
which will supply up to €100 billion in loans to member states.
Even more substantially, the European Council has agreed to the
creation of the Next Generation EU (NGEU), of which the largest
part is the Recovery and Resilience Facility (RRF) totalling €672.5
billion, comprising €312.5 billion in grants to member
states and €360 billion in loans. The RRF will be funded through
debt issuance of up to €750 billion (in 2018 prices), with
the largest portion of issuance to take place in 2021-2024.
A further €77.5 billion in grants will be funnelled to member
states through existing programmes.
These new programmes will increase the EU's indebtedness almost
twenty-fold, from around €50 billion to just under €1
trillion. Notwithstanding this very significant increase in debt,
Moody's believes that the protections in place, in particular
the provisions in the Treaty on the Functioning of the European Union
and other legal documents which create what amounts in Moody's view
to a joint and several undertaking by all member states to ensure the
EU is able to service its debt obligations, allied with the credit
strength of many large EU members, support the Aaa rating.
Moody's notes that the effectiveness of the budget process means
that this support framework has not yet needed to be tested.
FIRST DRIVER: VERY STRONG MEMBER WILLINGNESS AND CAPACITY TO SUPPORT
THE EU'S DEBT SERVICE OBLIGATIONS
Moody's considers the willingness of EU members to support the EU
to be very strong, given the considerable political and economic
commitment to the EU and the strong incentives to ensure that the EU remains
solvent. The EU plays a critical role in promoting economic and
political integration and harmony across Europe. Its financial
resilience is critical to that role, and its default would entail
significant financial and political costs for Europe, including
through the considerable reputational risks it would imply for core European
countries, such as Germany and France, and would likely increase
borrowing costs.
Member states' capacity to support is very high, both individually
and collectively. Approximately 56% of the total contributions
to the EU budget come from members rated between Aaa and Aa3. Those
members include Germany, France, the Netherlands, Belgium,
Sweden, Austria, Denmark, Finland, Czech Republic
and Luxembourg. Moreover, except for Romania all EU member
states have a stable or positive rating outlook, indicating the
resilience of member support.
SECOND DRIVER: PRUDENT FINANCIAL MANAGEMENT AND MULTIPLE LAYERS
OF DEBT SERVICE PROTECTION
The EU's management of its budgetary and off-budget expenditures
carries multiple layers of debt-service protection. According
to Article 310 of the EU Treaty the EU must produce a balanced budget.
Any borrowing for off-budgetary purposes is supported by:
(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;
(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 in terms of annual
budget contributions, which constitutes a significant additional
buffer of resources that the EU can draw upon.
From the perspective of the EU's rating, the most critical
aspect of the framework supporting the EU's capacity to service
its debt is Article 14 of the Council Regulation (EU, Euratom) No.
609/2014 which describes the measures to meet the EU's cash requirements.
It states that 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 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.
Further enhancements have been either implemented or proposed to existing
financial safeguards in light of the planned increase in the EU's
indebtedness. These include additional member state guarantees
-- 25% of the maximum €100 billion of loans under the
SURE programme are guaranteed directly by member states -- and limits
that will support liquidity through capping maximum annual repayment amounts
under SURE to €10 billion, and the grant part from NGEU to
€29.25 billion.
In addition, and as prerequisite to establishing NGEU, a temporary
increase in the own resources ceiling has been proposed, which would
add an additional buffer of 0.6% of annual gross national
income (GNI) of the EU-27 (around €81 billion based on 2018
GNI). This buffer would be tied to repayments falling due under
NGEU, which according to Moody's estimates would average about
€27 billion per year between 2028 and 2058.
Taken all together, in Moody's view these measures and enhancements
provide a very high level of assurance that the EU will be in a comfortable
position to meet the expected significant rise in its debt repayment obligations.
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".
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view that neither the willingness
and capacity of EU member states to support the EU, nor the safeguards
put in place to ensure that that happens in a timely manner, are
likely to change materially in the next twelve to eighteen months.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are not material for the EU's rating.
While the EU plays an important role in global initiatives to react to
climate change, and its capacity to do so underlines its importance
to its members, neither the EU itself nor its principal supporting
member states are directly exposed to heightened environmental risks.
Similarly, while all EU member states face long-term challenges
related to demographic and other social developments, and the development
of policy to address EU-wide social tensions (including those arising
from inequality and unemployment) is an important aspect of the EU's
role, social considerations do not directly influence the EU's rating
in a material way. Moody's notes that the EU's credit
profile will be influenced by the debt taken on to finance relief mechanisms
for the coronavirus pandemic, which Moody's regards as a social
risk under its ESG framework. However, the affirmation of
the EU's rating illustrates that Moody's does not consider
the impact to be material.
Governance considerations are an important support for the EU's
credit profile, and the EU's Aaa rating partly reflects its very
strong institutional setup, though aspects typically considered
to be related to governance are not key drivers of the rating.
Specific economic indicators as required by EU regulation are not available for the EU.
On 15 September 2020, a rating committee was called to discuss the
rating of the European Union. The main points raised during the
discussion were: The EU's member states' support remains very high,
reflecting the significant credit strength of its most highly-rated
members and their commitment to ensure continued soundness of the EU's
finances. The EU's prudent financial management and multiple layers
of debt service protection, including the potential recourse to
extraordinary support. The further enhancements proposed and introduced
to existing financial safeguards in light of the expected increase in
EU borrowing in response to the coronavirus pandemic.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
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. The joint and several nature of
the obligations of member countries vis-à-vis EU
obligations has never been tested. Should anything occur which
suggests that this feature is weaker than previously anticipated,
that would pose strong downward pressure on the rating. Downward
pressures would also result from 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.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in June 2019 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147813.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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/Sub Sovereign
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
