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October 29, 2020

Moody’s lowers EU rating outlook to ‘negative’

Moody’s has lowered its outlook for the European Union’s AAA credit rating to “negative” and warned that the bloc’s rating could be downgraded, according to a press release. It said the move reflected the negative outlook for the ratings of the EU’s key budget contributors. Earlier this year, Moody’s put ratings of Germany, France, Netherlands and the UK on a negative outlook. It said that these nations were all exposed to the region’s debt crisis, hurting their creditworthiness. The ratings agency said that in case of “extreme stress”, the AAA-rated member states were more likely to service their own debt obligations rather than “prioritise their commitment to backstop the EU debt obligations”. Moody’s believes that it is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key members states’ probability of default.
It added that if the AAA-rated member states were to default on their debt obligations, there were likely to be defaults on the loans that back the EU’s debt and the bloc’s cash reserve was also likely be stressed. “Hence, it is reasonable to assume that the EU’s creditworthiness should move in line with the creditworthiness of its strongest key member states,” the agency said. Germany, France, Netherlands and the UK together account for about 45 pc of the EU’s budget revenue. Moody’s warned that if the credit ratings of these member states were downgraded, it could have a knock-on effect on the EU’s rating. “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 added. The outlook for the EU’s ratings could return to stable if the outlooks on the ratings of the key Aaa countries with contributions to the EU budget also returned to stable. In a related rating action, Moody’s also changed to negative from stable its outlook on the Aaa long-term issuer rating and the provisional Aaa MTN programme rating of the European Atomic Energy Community (Euratom), on whose behalf the European Commission is also empowered to borrow.

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