S&P downgrades EU debt rating, officials hit back

Since the S&P put a negative outlook on the EU in January 2012, it has downgraded ratings for a number of members. Photo — Bloomberg file

BRUSSELS: The Standard and Poor's ratings agency downgraded the European Union's credit-worthiness by one notch yesterday, blaming threats to cohesion including Britain's role in curtailing budgets and holding a membership referendum.

But Brussels angrily slapped down the agency's decision to slash its long-term debt rating from "AAA" to "AA+", saying the grounds cited were "questionable".

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.

Budgetary negotiations
Explaining its decision, the agency said: "In our view, 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."

"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."

Brussels disputed S&P's action, 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 per cent.

The agency said that the European Union 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, with Ireland and Portugal accounting for 80 per cent of the total. 


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