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22nd Jul 2018

Ratings agency downgrades EU on summit day

  • 'It can influence investments in Europe,' the Swedish leader said on S&P's decision (Photo: david.nikonvscanon)

Standard&Poor's, one of the leading US-based ratings agencies, on Friday (20 December) downgraded EU's rating by one notch to AA+, citing concerns over how the bloc's budget was funded.

"In our opinion, the overall creditworthiness of the now 28 European Union member states has declined," Standard&Poor's said in a note to investors.

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Last month, it downgraded the Netherlands, one of the few remaining triple-A rated EU countries. In the eurozone, only Germany, Luxembourg and Finland have kept their top rating.

The agency noted that "EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states."

EU talks for the 2014-2020 budget took over a year as richer countries - notably the UK and Germany - insisted on a cut, while southern and eastern ones wanted more money.

The European Parliament also held out on a final deal for months, over a disagreement about linking EU structural funds to economic targets.

The news struck just as EU leaders were gathering for their last day of a summit in Brussels.

European Commission chief Jose Manuel Barroso dismissed the rating downgrade.

"We have no deficit, no debt and also very strong budget revenues from our own resources. We disagree with this particular ratings agency," the top official said in a press conference at the end of the EU summit.

"We think the EU is a very credible institution when it comes to its financial obligations," Barroso added.

German Chancellor Angela Merkel said the EU had actually shown "capacity to act" as it managed to get a deal and have a multi-annual budget on 1 January 2014.

EU Council chief Herman Van Rompuy downplayed the S&P decision. "The downgrade will not spoil our Christmas," he said.

But other leaders were more cautious.

Swedish Prime Minister Fredrik Reinfeldt said the downgrade was "something the EU as a whole has to take on board."

"It can influence investments in Europe," he said.

Italian Prime Minister Enrico Letta said the decision should not be ignored, as it showed that Europe has not yet overcome the economic crisis.

The downgrade is unlikely to have an immediate impact, however.

The EU's borrowing capacity amounts €110 billion, backed by the EU budget. It has used it in the Irish and Portuguese bailouts, as well as in assistance to non-eurozone countries such as Latvia and Romania.

Carsten Brzeski, chief economist with ING Bank, has calculated that the EU has only €55 billion of outstanding debt to repay - less than 0.5 percent of EU's gross domestic product.

"The EU's borrowing costs are 30 basis points above Germany, so very low. Unless it needs to borrow more money for Hungary or Romania, the credit rating downgrade will have no impact at all," Brzeski told this website.

The ratings agency may however further downgrade the eurozone bailout fund (ESM), after it stripped it of its top rating in January.

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