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Business

EU loses AAA credit rating

© Photo: AFP

Text by FRANCE 24

Latest update : 2013-12-20

The European Union was stripped of its AAA credit rating by the Standard & Poor’s agency on Friday as the 28-state block struggles to deal with the debt problems afflicting a number of its members and internal conflict over its budget.

The downgrade by one notch leaves the union with a rating of AA+ which, though still considered solid, could make it more expensive for the EU to borrow money on bond markets.

S&P made the announcement just as EU leaders were holding a summit marking a big political step forward with an agreement on a banking union intended eventually to ring-fence failing banks from bringing down an entire economy as happened in Ireland.

The ensuing crisis forced the bloc to step in with billions in funds to bail out entire economies, putting national budgets under constraints and exposing an endemic debt problem in some countries such as France and Italy.

S&P said loans to Ireland and Portugal - which received bailouts - represent 80 percent of the EU's outstanding loans.

Meanwhile, the union is currently embroiled in an ongoing battle over its budget, with some members such as Britain pushing for a curtailment on how much they contribute financially to the EU.

"In our view, EU budgetary negotiations have become more contentious signaling what we consider to be rising risks to the support of the EU from some member states,” said S&P in explaining its downgrade decision.

"The downgrade reflects our view of the overall weaker creditworthiness of the EU's member states. We believe the financial profile of the EU has deteriorated, and that cohesion among EU members has lessened," it added.

Brussels: Reasons for downgrade ‘questionable’

However, Brussels disputed the reasoning behind the agency's decision to slash its long-term debt rating, saying the EU's credit-worthiness should be assessed on its "own merit" as the bloc's budget benefits from a special treaty status and runs neither a deficit nor debt.

Member states are also bound to "always balance the EU budget", EU Economic Affairs Commissioner Olli Rehn said.

"The Commission disagrees with S&P that member state obligations to the budget in a stress scenario are questionable.

“All member states have always and also throughout the financial crisis provided their expected contributions to the budget in full and in time," he said.

Since the S&P put a negative outlook on the EU in January 2012, it has downgraded ratings for a number of members and in November cut the "AAA" of the Netherlands, leaving just six EU countries with top ratings.

This meant that since 2007, the overall contribution of AAA-rated countries to EU revenues had nearly halved to 31.6 percent.

The agency said that the EU had made outstanding loans of 56 billion euros ($76 billion), and the average life of the loans was likely to rise from 12.5 years to 19.5 years.

(FRANCE 24 with AFP and AP)

Date created : 2013-12-20

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