DBRS Ratings GmbH confirmed the European Union’s Long-Term Issuer Rating at AAA and its Short-Term Issuer Rating at R-1 (high). The trend on both ratings remains Stable.
According to the rating agency, the Stable trend reflects DBRS Morningstar’s view that member states’ commitment and ability to support the Union is expected to remain strong, despite the rising debt and the new challenges the EU is facing related to Russia’s invasion of Ukraine.
The projected material increase in EU debt to almost €1 trillion, mainly as a result of the Next Generation EU instrument, will likely generate high debt service costs in the future, DBRS notes. Nevertheless, it estimates that the increase in the budgetary headroom, the obligation of member states to finance the agreed expenditure levels, the future introduction of new EU own resources and repayments from loan beneficiaries should comfortably enable the Union to repay its debt. It also notes that frictions between the European Commission and Hungary and Poland, which have intensified over recent years will not derail cohesiveness and commitment to the EU’s obligations.
DBRS Morningstar rates the EU primarily based on its Support Assessment of AAA. This is underpinned by the creditworthiness of the Union’s core member states, their strong commitment to the EU, and the uplift from multiple sources of support, particularly from non-core AAA-rated member states. At the same time, the EU benefits from conservative budgetary management. Multiple layers of debt-service arrangements that protect creditors remain in place, despite the significant rise in debt following the introduction of the Next Generation EU programme. The Union has a de facto preferred creditor status.
The EU’s ratings could be downgraded if one or a combination of the following occurs: a marked deterioration in the creditworthiness of a single core shareholder, particularly if it reflects a material weakening in the cohesion of core member states or of the strength of their political commitment to the EU; a rise in anti-EU sentiment due to a lack of cohesion that ultimately results in a material increase in the risk of the EU’s dissolution; or, although unlikely, given its Stable trend, a downgrade of Germany, which is now at AAA, Stable.
Source: Cyprus News Agency