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Fitch Affirms European Union and Euratom at 'AAA'; Outlook Stable
March 2, 2017 / 8:54 PM / 9 months ago

Fitch Affirms European Union and Euratom at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON/PARIS, March 02 (Fitch) Fitch Ratings has affirmed the European Union's (EU) and the European Atomic Energy Community's (Euratom) Long-Term Issuer Default Ratings (IDRs) at 'AAA' and Short-Term IDRs at 'F1+'. The Outlooks on the Long-Term IDRs are Stable. The issue ratings of EU's and Euratom's unsecured bonds have been affirmed at 'AAA'. The affirmation of EU's and Euratom's ratings reflects the continuing strong commitment from the 28 member states to honour their contributions to the EU's budget, and more specifically, the support of the 'AAA'-rated member states. KEY RATING DRIVERS EU's and Euratom's ratings and Stable Outlook reflect the following key rating drivers: EU and Euratom are supranational administrative bodies. Their 'AAA' ratings reflect Fitch's view that their debt is ultimately backed by EU budget revenues. This relies on the ability and propensity of member states to honour their budget commitments. The EU's indebtedness (EUR53.9 billion at end-2016) is only incurred for the purpose of lending to member states (through the balance of payments (BoP) and the European Financial Stabilisation Mechanism programmes (EFSM)) or to neighbouring sovereigns (through the Macro-Financial Assistance Programme (MFA)). The EU is not allowed to borrow for other purposes than on-lending to sovereigns. Euratom's indebtedness (EUR0.25 billion at end-2016) is dedicated to on-lending to member states or neighbouring countries to finance nuclear power projects. Lending activity for both institutions is funded outside the budget through dedicated borrowings made in the name of the EU and Euratom. MFA's and Euratom's loans to neighbouring countries are partly protected by a guarantee fund, which also covers EU guarantees to loans made by the European Investment Bank (AAA/Stable) for the implementation of the EU external lending mandate. EU loans are extended to countries facing economic difficulties, predominantly EU member states. The two largest single exposures are Portugal (BB+/Stable), at 45% of the total portfolio, and Ireland (A/Stable) at 41.7% of total portfolio. Exposure to non-EU countries, mostly Ukraine (CCC), is growing. The portfolio is highly concentrated. However, EU enjoys preferred creditor status equivalent to other multilateral development banks; it has never suffered a loss on its loan portfolio. The features and maturities of loans extended by EU and Euratom are aligned with their respective debt profiles and this has remained so after the refinancing of debt following the extension of Ireland's loan maturity in 2015 and Portugal's loan maturity in 2016, as made possible by EU legislation. The creditworthiness of EU and Euratom is supported by EU legislation, which allows their debt to be repaid through priority recourse to EU budget revenues over other non-priority expenses. The Multiannual Financial Framework (MFF) sets annual ceilings for 2014-2020, limiting annual expenditure that are mainly financed by resources transferred by member states to the EU (0.98% of EU's gross national income (GNI) on average in this period). For the 2017 budget, the annual resources expected to be transferred by member states represent 0.85% of the EU's GNI. In Fitch's view, member states' ability to contribute to the EU budget is strong. Despite several sovereign downgrades in the past 12 months (most notably Finland and the UK), the overall credit quality of EU countries remains high. Of the EU's budget national contributions for 2017, 29.6% will be contributed by member states rated 'AAA' (Germany, Netherlands, Sweden, Denmark and Luxembourg). EU member states may have to contribute to budget revenues, if necessary, beyond their initial share, up to a maximum of 1.2% of EU's gross national income every year. This ceiling has been reduced from 1.23% in 2016. Under the assumption that member states would restrict their additional transfers to their current share in the EU resources, additional annual contributions from 'AAA'-rated member states would range from EUR10 billion to EUR15 billion in 2017-2020. This would cover the combined yearly debt service of EU and Euratom based on their actual loan portfolios during the same period. In Fitch's view, the exit vote by the UK in the referendum on 23 June 2016 does not have any immediate implications for the ratings of the EU/Euratom, particularly given that the UK is not included in the group of 'AAA'-rated member states whose contributions underpin the EU's debt service. However, the rise of the anti-EU sentiment across Europe, as is illustrated by the significant emergence of populist parties across Europe in the past year, may lead, over time, to weaker political cohesion among member states, and therefore increase the risk of the EU dismantling. RATING SENSITIVITIES The factors that could, individually or collectively, result in negative rating action are: - A downgrade of an existing 'AAA'-rated member state resulting in the annual debt service not being covered by potential additional contributions from 'AAA'-rated member states; -Significant increase in the combined annual debt service of EU and Euratom as a result of higher lending, or if the quality of the risk management framework deteriorates significantly; - A continued rise of the anti-EU sentiment leading to weaker political cohesion and increased risk of a dismantling of the EU. KEY ASSUMPTIONS The ratings and Outlook are sensitive to a number of assumptions: -Member states will remain committed to paying their monthly contributions to the EU budget; therefore contributions to the EU budget are assumed to remain predictable and be provided by member states on a timely basis; -No 'AAA'-rated member states will choose to leave the EU in the short- to medium-term. Contact: Primary Analyst Nicholas Perry Analyst +44 203 530 1795 30 North Colonnade London E14 5GN Secondary Analyst Eric Paget-Blanc Senior Director +33 144 299 133 Committee Chairperson Gordon Scott Managing Director +44 203 530 1075 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on - Sources of information - The source(s) of information used to assess these ratings were information provided by the European Union and by Euratom. Applicable Criteria Supranationals Rating Criteria (pub. 27 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019978 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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