S&P lifts outlook on EU credit rating

Standard & Poor’s has raised the outlook on the EU’s credit rating to positive, citing the central role to be played by Brussels in the bloc’s recovery efforts from the coronavirus crisis.

The move raises the possibility that the EU could regain its top-notch triple A rating with S&P, a status it lost in 2016 when the rating agency said a lack of political cohesion following the Brexit vote had damaged the organisation’s creditworthiness. Rivals Fitch and Moody’s already rate the EU at triple A.

“We believe the political consensus in establishing the [recovery fund], and endowing it with debt-raising capacity, is a major step forward for the strengthening of political cohesion by EU member states,” said S&P. “This goes some way to addressing what we saw as weaker political cohesion in 2016 when the UK decided to leave the EU.”

The credit rating of the EU itself, as opposed to individual member states, is about to take on much greater importance as the EU raises unprecedented amounts from investors for the €750bn recovery fund agreed by European leaders earlier this month — a move hailed as a breakthrough for the region’s bond market by investors.

The new bonds issued to pay for the fund will transform the EU itself into one of the bloc’s biggest borrowers over the next two years, ranking behind only the largest member states and eclipsing all other non-sovereign debt issuers. 

Brussels, which currently has roughly €50bn of bonds outstanding, is able to borrow more cheaply than some eurozone members with weaker finance, like Italy and Spain. The EU’s 12-year bonds currently yield minus 0.12 per cent, roughly in line with double A rated France.

The EU will sell an extra €750bn of bonds between next year and 2026 and pass the proceeds to members hit by the Covid-19 crisis in the form of €360bn of loans and €390bn of grants. It will also begin a separate €100bn bond issuance programme in September to fund a package of loans to support efforts to keep workers in jobs during the pandemic.

S&P said the positive outlook reflects the possibility of an upgrade over the next two years if the EU’s greater policy importance is confirmed during the implementation of the recovery efforts, adding that it regards the establishment of the €750bn fund as a “key step” towards fiscal union in the bloc.

The assessment of the EU’s creditworthiness was dependent on the backing of the 11 wealthiest member states which are net contributors to its budget, S&P said.


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