Frankfurt am Main, September 03, 2012 -- Moody's Investors Service has today changed to negative from stable its
outlook on the Aaa long-term issuer rating of the European Union
(EU). The rating agency has also changed to negative from stable
its outlook on the provisional (P)Aaa rating of the EU's medium-term
note (MTN) programme.
A provisional rating for a debt facility is an indication of the rating
Moody's would likely assign to future draw-downs from the
facility, pending the receipt of documentation detailing the terms
of the debt issuance. Moody's policy is to assign provisional
ratings to all MTN programmes.
The outlook change to negative reflects the negative outlooks now assigned
to the Aaa sovereign ratings of key contributors to the EU budget:
Germany, France, the UK and the Netherlands, which together
account for around 45% of the EU's budget revenue.
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.
On 23 July 2012, Moody's had changed to negative its outlooks
for the Aaa ratings of Germany and the Netherlands.
The Aaa long-term issuer rating, the provisional (P)Aaa long-term
rating and the provisional (P)Prime-1 short-term issuer
rating for the EU's debt issuance programmes as well as the Aaa-ratings
on existing EU issuances remain unchanged. This is because Moody's
two key rationales for assigning a Aaa to the EU remain in place,
namely : 1) the EU's conservative budget management,
and 2) the creditworthiness and support provided by its 27 member states.
The European Commission is empowered to borrow on behalf of the EU,
which issues debt to lend to borrowing countries under the European Financial
Stabilisation Mechanism, the Balance of Payments Assistance and
the Macro Financial Assistance. The EU is also a guarantor for
certain external lending by the European Investment Bank (EIB, Aaa
stable).
In a related rating action, Moody's also changed to negative
from stable its outlook on the Aaa long-term issuer rating and
the provisional (P)Aaa MTN programme rating of the European Atomic Energy
Community (Euratom), on whose behalf the European Commission is
also empowered to borrow. Euratom's key credit characteristics
are identical to the EU's, particularly the backing by the
EU's budgetary resources and by 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.
Many of the considerations driving the change to the EU's rating
outlook -- in particular the weakening of the creditworthiness of
key Aaa-rated member states -- are also relevant to the credit
standing of other European supranational debt-issuing entities,
such as the EIB, the European Investment Fund (Aaa stable),
the Council of Europe Development Bank (Aaa stable) and the European Bank
for Reconstruction and Development (Aaa stable). However,
these entities are Multilateral Development Banks (MDBs) with significant
amounts of paid-in capital, accumulated reserves, and
highly diversified credit portfolios, which differentiates them
from the EU. Following today's rating action on the EU and
Euratom, Moody's will assess to what extent the credit-enhancing
features of MDBs are sufficient to mitigate the impact of the weakening
of the creditworthiness of key Aaa-rated member states on those
MDBs' credit standing.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on the EU's long-term ratings reflects
the negative outlook on the Aaa ratings of the member states with large
contributions to the EU budget: Germany, France, the
UK and the Netherlands, which together account for around 45%
of the EU's budget revenue. 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 believes that it is reasonable to assume the same probability
of default by the EU on its debt obligations as the highest rated key
members states' probability of default. Whereas Moody's
acknowledges that there are structural features in place that enhance
the EU's creditworthiness, they are in Moody's view
not sufficient to delink the EU's ratings from the ratings of its
strongest key member states. In particular, in the event
of a scenario of extreme stress in which Aaa-rated member states
would default on their debt obligations, 1) defaults on the loans
that back the EU debt would be highly likely, 2) the EU's
cash reserve would likely be stressed, and 3) the EU member states
would likely not prioritise their commitment to backstop the EU debt obligations
over the service of their own debt obligations. Hence, it
is reasonable to assume that the EU's creditworthiness should move
in line with the creditworthiness of its strongest key member states.
RATIONALE FOR UNCHANGED Aaa/(P)Aaa/(P)P-1 RATINGS
Moody's has left the EU's Aaa/(P)Aaa/(P)P-1 ratings
unchanged because the key rationales supporting the EU's creditworthiness
remain in place: 1) the EU's conservative budget management,
and 2) the creditworthiness and support its 27 member states provide.
Four of the six largest EU countries by contribution to the EU budget
have Aaa ratings: Germany, France, the UK and the Netherlands.
Italy's rating is Baa2 negative. Spain's is Baa3,
on review for possible downgrade.
Hence, debt issued by the European Union is backed by multiple layers
of debt-service protection: 1) the borrowing country's
promise to repay its loan (the funds raised are lent back to back,
and the borrowing country pays down the interest and loan principal;
2) the EU's budgetary resources; and 3) the European Commission's
right to call for additional resources from member states, if needed.
The EU's conservative budget management is based on the EU Treaty,
which requires the European Union to balance the EU budget, prohibiting
any borrowing to cover budgetary shortfalls. In addition,
the EU's Multiannual Financial Framework (MFF) provides the general
framework for a seven-year period and establishes a ceiling for
total expenditures for the annual budgets during that period.
Moreover, the EU may defer budget expenditures to accommodate its
debt service. The maturing debt of both the EU and Euratom will
amount to approximately EUR1.2 billion in 2012, whereas the
EU's budget for the year amounts to EUR129.1 billion in payment
appropriations, with cohesion-related expenditures potentially
available for postponement; their share in the overall budget is
typically one third. The total maturing debt of EU and Euratom
per annum will increase in the coming years, peaking in 2015 at
less than EUR10 billion, but the ratio of maturing debt relative
to the EU budget will likely remain significantly lower than 10%.
If the EU budget is insufficient to cover debt service, the European
Commission has the right to call on EU member states to cover any shortfalls.
Articles 310 and 323 of the Treaty on the functioning of the EU legally
obligate member states to provide funds to meet all of the EU's
obligations without nationale budgetary procedures. If the EU needs
to call for additional resources from member states, the amount
it calls for from each member state does not have to be proportionate
to that member's contribution to the EU budget.
WHAT COULD MOVE THE RATING DOWN
Risks that would negatively affect the creditworthiness of the EU,
leading to a downgrade of the EU's rating, would include a
deterioration in the creditworthiness of EU member states (as would be
reflected by a downgrade in Moody's ratings for these states).
In this context, the EU's rating is particularly sensitive
to changes in the ratings of the four Aaa countries with large contributions
to the EU budget, i.e., Germany, France,
the UK and the Netherlands. Additionally, a weakening of
the commitment of the member states to the EU and changes to the EU's
fiscal framework that led to less conservative budget management would
be credit negative.
WHAT COULD CHANGE THE OUTLOOK TO STABLE
The outlook for the EU's ratings could return to stable if the outlooks
on the ratings of the key Aaa countries with contributions to the EU budget
also returned to stable.
RATING METHODOLOGY
Moody's assigned the EU's ratings by evaluating factors relevant
to the specific characteristics of the issuer, reflecting its dual
nature as a financing facility and vehicle of public policy. Moody's
compared these attributes to those of other issuers and its EU's
ratings are similar to those of other issuers with similar credit risk.
Moody's assigns a provisional rating when it is highly likely that the
rating will become definitive, after the agency has received all
the necessary documents. Moody's will monitor the transaction on
an ongoing basis to ensure that it continues to perform in the manner
expected, and will announce and disseminate any subsequent changes
to the rating through its Client Service Desk.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody's is not
an auditor and cannot in every instance independently verify or validate
information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
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.
Dietmar Hornung
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
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's maintains the European Union's Aaa rating, changes outlook to negative
