Credit rating agency Moody’s Investors Service has turned negative on the European Union (EU), due to new negative outlooks for several of the region’s key economies.
Moody’s says that it has changed its outlook on the long-term issuer rating of the EU to negative to reflect the negative outlooks now assigned to the sovereign ratings of key contributors to the EU budget: Germany, France, Britain and the Netherlands, which together account for around 45% of the EU’s budget revenue.
It believes that it is “reasonable to assume” that the EU’s creditworthiness should move in line with the creditworthiness of its strongest members due to the significant linkages between those countries and the EU, and the likelihood that the governments would not prioritize their commitment to backstop the EU debt obligations over servicing their own debt.
Moody’s has left the EU’s ratings unchanged because the key rationales supporting its creditworthiness remain in place, it says, including: the EU’s conservative budget management, and, the creditworthiness and support its 27 member states provide.
The EU could face a downgrade, Moody’s says, if EU member states are downgraded (particularly Germany, France, Britain 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, it notes.
Conversely, the outlook for the EU’s ratings could return to stable if the outlooks on the ratings of the key countries also returned to stable.