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Moody's Downgrades European Union To Outlook Negative

Tyler Durden's picture




 

Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative.

Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering  the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not  prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.

Interestingly they also note that a further cut could occur due to: changes to the EU's  fiscal framework that led to less
conservative budget management...

 

Full statement:

Moody's maintains the European Union's Aaa rating, changes outlook to negative

Frankfurt am Main, September 03, 2012 -- Moody's Investors Service has today changed to negative from stable its outlook on the Aaa long-term issuer rating of the European Union (EU). The rating agency has also changed to negative from stable its outlook on the provisional (P)Aaa rating of the EU's medium-term note (MTN) programme.

A provisional rating for a debt facility is an indication of the rating Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance. Moody's policy is to assign provisional ratings to all MTN programmes.

The outlook change to negative reflects the negative outlooks now assigned to the Aaa sovereign ratings of key contributors to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45% of the EU's budget revenue. Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not prioritise their commitment to backstop the EU debt obligations over servicing their own debt obligations. On 23 July 2012, Moody's had changed to negative its outlooks for the Aaa ratings of Germany and the Netherlands.

The Aaa long-term issuer rating, the provisional (P)Aaa long-term rating and the provisional (P)Prime-1 short-term issuer rating for the EU's debt issuance programmes as well as the Aaa-ratings on existing EU issuances remain unchanged. This is because Moody's two key rationales for assigning a Aaa to the EU remain in place, namely : 1) the EU's conservative budget management, and 2) the creditworthiness and support provided by its 27 member states.
 
The European Commission is empowered to borrow on behalf of the EU, which issues debt to lend to borrowing countries under the European Financial Stabilisation Mechanism, the Balance of Payments Assistance and the Macro Financial Assistance. The EU is also a guarantor for certain external lending by the European Investment Bank (EIB, Aaa 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 (P)Aaa MTN programme rating of the European Atomic Energy Community (Euratom), on whose behalf the European Commission is also empowered to borrow. Euratom's key credit characteristics are identical to the EU's, particularly the backing by the EU's budgetary resources and by the European Commission's right to call for additional resources from member states if needed. Hence, Euratom's ratings tend to move in line with the EU's.

Many of the considerations driving the change to the EU's rating outlook -- in particular the weakening of the creditworthiness of key Aaa-rated member states -- are also relevant to the credit standing of other European supranational debt-issuing entities, such as the EIB, the European Investment Fund (Aaa stable), the Council of Europe Development Bank (Aaa stable) and the European Bank for Reconstruction and Development (Aaa stable). However, these entities are Multilateral Development Banks (MDBs) with significant amounts of paid-in capital, accumulated reserves, and highly diversified credit portfolios, which differentiates them from the EU. Following today's rating action on the EU and Euratom, Moody's will assess to what extent the credit-enhancing features of MDBs are sufficient to mitigate the impact of the weakening of the creditworthiness of key Aaa-rated member states on those MDBs' credit standing.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on the EU's long-term ratings reflects the negative outlook on the Aaa ratings of the member states with large contributions to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45% of the EU's budget revenue. The creditworthiness of these member states is highly correlated, as they are all exposed, albeit to varying degrees, to the euro area debt crisis.

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. Whereas Moody's acknowledges that there are structural features in place that enhance the EU's creditworthiness, they are in Moody's view not sufficient to delink the EU's ratings from the ratings of its strongest key member states. In particular, in the event of a scenario of extreme stress in which Aaa-rated member states would default on their debt obligations, 1) defaults on the loans that back the EU debt would be highly likely, 2) the EU's cash reserve would likely be stressed, and 3) the EU member states would likely not prioritise their commitment to backstop the EU debt obligations over the service of their own debt obligations. Hence, it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states.

RATIONALE FOR UNCHANGED Aaa/(P)Aaa/(P)P-1 RATINGS

Moody's has left the EU's Aaa/(P)Aaa/(P)P-1 ratings unchanged because the key rationales supporting the EU's creditworthiness remain in place: 1) the EU's conservative budget management, and 2) the creditworthiness and support its 27 member states provide. Four of the six largest EU countries by contribution to the EU budget have Aaa ratings: Germany, France, the UK and the Netherlands. Italy's rating is Baa2 negative.

Hence, debt issued by the European Union is backed by multiple layers of debt-service protection: 1) the borrowing country's promise to repay its loan (the funds raised are lent back to back, and the borrowing country pays down the interest and loan principal; 2) the EU's budgetary resources; and 3) the European Commission's right to call for additional resources from member states, if needed.

The EU's conservative budget management is based on the EU Treaty, which requires the European Union to balance the EU budget, prohibiting any borrowing to cover budgetary shortfalls. In addition, the EU's Multiannual Financial Framework (MFF) provides the general framework for a seven-year period and establishes a ceiling for total expenditures for the annual budgets during that period.

Moreover, the EU may defer budget expenditures to accommodate its debt service. The maturing debt of both the EU and Euratom will amount to approximately EUR1.2 billion in 2012, whereas the EU's budget for the year amounts to EUR129.1 billion in payment appropriations, with cohesion-related expenditures potentially available for postponement; their share in the overall budget is typically one third. The total maturing debt of EU and Euratom per annum will increase in the coming years, peaking in 2015 at less than EUR10 billion, but the ratio of maturing debt relative to the EU budget will likely remain significantly lower than 10%.

If the EU budget is insufficient to cover debt service, the European Commission has the right to call on EU member states to cover any shortfalls. Articles 310 and 323 of the Treaty on the functioning of the EU legally obligate member states to provide funds to meet all of the EU's obligations without nationale budgetary procedures. If the EU needs to call for additional resources from member states, the amount it calls for from each member state does not have to be proportionate to that member's contribution to the EU budget.
 
WHAT COULD MOVE THE RATING DOWN

Risks that would negatively affect the creditworthiness of the EU, leading to a downgrade of the EU's rating, would include a deterioration in the creditworthiness of EU member states (as would be reflected by a downgrade in Moody's ratings for these states). In this context, the EU's rating is particularly sensitive to changes in the ratings of the four Aaa countries with large contributions to the EU budget, i.e., Germany, France, the UK 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.

 

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Mon, 09/03/2012 - 18:11 | 2758795 JohnnyBriefcase
JohnnyBriefcase's picture

Nobody saw this coming.

Mon, 09/03/2012 - 18:23 | 2758798 Ratscam
Ratscam's picture

you mean as like all the people returned to Fukushima and live healthy and happy ever after?

Mon, 09/03/2012 - 18:12 | 2758797 oldfruit1
oldfruit1's picture

Draghi unveiling what exactly?

Mon, 09/03/2012 - 19:23 | 2758915 CrashisOptimistic
CrashisOptimistic's picture

Bloomberg radio just reported a leak that Draghi has concluded that buying bonds out to 3 years is not outside madate, but buying long term bonds is outside mandate.

Mon, 09/03/2012 - 18:13 | 2758799 LongSoupLine
LongSoupLine's picture

Moodys maintains AAA rating...

 

About as AAA as 2008 MBS's.  Moodys, once again, proving they're as useful as tits on a bull.

Mon, 09/03/2012 - 19:01 | 2758882 Schmuck Raker
Schmuck Raker's picture

Useful to whom? That's the question.

"Four of the six largest EU countries by contribution to the EU budget have Aaa ratings: Germany, France, the UK and the Netherlands. Italy's rating is Baa2 negative."

Seems obvious they deliberately failed to mention Spain.

What's Moody's rating for Shhhhhpain?

Mon, 09/03/2012 - 19:06 | 2758896 machineh
machineh's picture

Never mind Spain -- why is FrAAAnce still rated triple A?

Is this some kind of insider joke?

Mon, 09/03/2012 - 19:09 | 2758899 Schmuck Raker
Schmuck Raker's picture

The answer: Baa3 [Negative?]

London, 13 June 2012 -- Moody's Investors Service has today downgraded Spain's government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody's expects to conclude the review within a maximum timeframe of three months.

Mon, 09/03/2012 - 18:15 | 2758801 Boilermaker
Boilermaker's picture

What's funny is that this SHOULD matter.  But, you know damn good and well it won't.

Mon, 09/03/2012 - 18:17 | 2758803 Boilermaker
Boilermaker's picture

Ah, fuck you <you know who you are>.

Mon, 09/03/2012 - 18:17 | 2758802 lolmao500
lolmao500's picture

Bunch of pussies. DOWNGRADE THEM ALL until Europeans (Germans and French in particular) get so pissed off they march on their capital and stay there till the euro is abolished.

Mon, 09/03/2012 - 18:18 | 2758806 Piranhanoia
Piranhanoia's picture

Another few million people just went deeper into poverty.  

Iceland and Bulgaria getting smarter every day.   Who's next? 

Mon, 09/03/2012 - 18:19 | 2758807 buzzsaw99
buzzsaw99's picture

moody's, lulz

Mon, 09/03/2012 - 18:21 | 2758812 Atomizer
Atomizer's picture

Setting the next trap for peasantry bailout.

Mon, 09/03/2012 - 18:23 | 2758815 Heroic Couplet
Heroic Couplet's picture

Downgrade speaks directly to money, banks, the Rothschilds. Downgrade doesn't touch any country's or any person's wealth.

Mon, 09/03/2012 - 18:26 | 2758820 poor fella
poor fella's picture

That's awesome! 

They can now weaken the Euro, allowing for more growth!

The U.S. will follow suit, weaken the Dollar, stimulating growth!

Corporate profits will rise, commodities will rise, and Main Street can  __________  ?    oh shit

Mon, 09/03/2012 - 18:25 | 2758821 Bogdog
Bogdog's picture

AAA rating?

Bullish!!!!!!!!

What could possibly go wrong?

Mon, 09/03/2012 - 18:29 | 2758827 magpie
magpie's picture

EUR/USD 1.27

Mon, 09/03/2012 - 18:43 | 2758837 Haager
Haager's picture

I spit the coffee all over the keyboard. Couldn't you do something to warn me before that? 

Mon, 09/03/2012 - 18:29 | 2758825 TWSceptic
TWSceptic's picture

How is it that these agencies have any credibility left? What's their purpose? People are wrong all the time, don't need an expensive building with a bunch of paper pushers for that.

Mon, 09/03/2012 - 18:37 | 2758826 Why Not
Why Not's picture

You think? In other news, Japan bombs Pearl Harbor!!!

Mon, 09/03/2012 - 18:32 | 2758829 MachuPicchu
MachuPicchu's picture

But, but... AAA is old fashion! All come along n Bs notches.. is the new star in Europe

Mon, 09/03/2012 - 18:37 | 2758831 GlomarHabu
GlomarHabu's picture

 

 

This is really a great sight and Tyler works his butt off to keep us informed...HOWEVER...why is it that I feel a type of country-store-sit-around-the-cracker-barrel ennnui ,just waiting for the economic tsunami roll'n across the ocean at 500 mph aimed right at the entire world to make the shoreline?

I mean if it weren't for the financial argot we get to play with and assume we are somewhat close in our predictions what the hell would go on 'round ZH. I think Tyler should include a nice picture of a Victoria Secrets model in some "fresh" underwear..round cheeks peek'n out etc.etc.  I mean a person could go blind look'n at all the graphs put up on a weekly basis..anyone ever counted the number presented?

Bet not.

But a nice young fanny would be a refreshing renewal in the power of ...(ok, fill in this part).

Just say'n

Mon, 09/03/2012 - 19:24 | 2758930 TrustWho
TrustWho's picture

Sorry, but banzai fills this role quite well. Most think he could provide more banzai babes, but we are probably gluttons.

Tue, 09/04/2012 - 08:19 | 2759722 falak pema
falak pema's picture

read your CV; you were in all the wrong places at the wrong time.

Now thats Kismet; or was it your lucky charm?

How did you fare in the Merryl Lynch flame out? 

Its a wonderful life : War, MIC and banksta pedigree. 

But I guess a whole generation of US university grads went through that grind mill. 

A man  of the times for sure! 

Mon, 09/03/2012 - 18:47 | 2758846 youngman
youngman's picture

and the Euro goes higher...lol...to me this is a joke right....

BUTT...the big problem here isn´t the EURO or the LIRA or DRACHMA...its that the politicians screwed up years ago...there is no "fixing" the problem....print Euros...bail out of the Euro..both will be very very hard on the countries and the people...no solution here...its fun to watch...but very sad

Mon, 09/03/2012 - 18:55 | 2758867 max2205
max2205's picture

1. They beat s&p?.
2. Nice timing since rates will be capped anyway
3. Who cares
4. Bullish!

Mon, 09/03/2012 - 19:26 | 2758932 CrashisOptimistic
CrashisOptimistic's picture

Nope.  Bloomberg radio just reported a leak from the ECB that Draghi has decided buying long term bonds is outside mandate.  He can buy only out to 3 yrs (somehow that is inside mandate).

Bodes poorly for the Spanish 10 yr.

Mon, 09/03/2012 - 19:01 | 2758886 phyregold
phyregold's picture

What are you views on bond investments right now?

Mon, 09/03/2012 - 19:11 | 2758904 Cheshire
Cheshire's picture

So Moody's just said Drahgi's up shit creek and is lying about having paddles.

Mon, 09/03/2012 - 19:19 | 2758917 TrustWho
TrustWho's picture

I just realized UK is responsible for ECB liabilities. Wjy is the UK so quite about discount window and LTROs?

Mon, 09/03/2012 - 19:29 | 2758935 Chief_Illiniwek
Chief_Illiniwek's picture

At this point, the reason to consider anything Moody's has to report is... what again?

Tue, 09/04/2012 - 05:13 | 2759540 Zero Govt
Zero Govt's picture

looking ahead out through the windscreen to see what's coming Moody's are (technically) worthless

looking in the rear view mirrors and Moody's putting up signs after a crash "Accident Occured Here" they're second to none

Mon, 09/03/2012 - 19:38 | 2758951 chump666
chump666's picture

European markets are dumb.

Melt-up on stocks/EUR was on China will stimulus speculation.  They won't print with overcapacity and inflation.

Should be huge USD bids (offset oil price) coming through on Asian session, will cap heroin induced rallies and send some reality to overbought markets. 

And hopefully Germany gets tough and tells the rest of the EU to f*ck off, especially those two Italian morons.  Hopefully.

Mon, 09/03/2012 - 19:54 | 2758977 DavosSherman
DavosSherman's picture

Days late and dollars short.

Just like derivatives.

Moodys are champs.

Mon, 09/03/2012 - 20:15 | 2759024 surf0766
surf0766's picture

Yes because $6.00 gas is better than $4.00 gas.  

 

nonsense. zirp is  qe3 or should i say nirp

Another round of mbs buying will set  inflation in an uncontrollable speed.

 

Mon, 09/03/2012 - 20:26 | 2759051 Dr Paul Krugman
Dr Paul Krugman's picture

About time.  Europe is not doing enough to suppliment their banking system.

Tue, 09/04/2012 - 05:01 | 2759534 Zero Govt
Zero Govt's picture

Europe doesn't have a banking system, we have a socialist system propping up the bankrupt within on what's left of the productive economy outside

..ever decreasing circles around a drain

Mon, 09/03/2012 - 20:32 | 2759068 syntaxterror
syntaxterror's picture

Bullish! Huge buy signal.

Mon, 09/03/2012 - 21:28 | 2759130 foodstampbarry
foodstampbarry's picture

Quick hurry! Somebody give another speech!

Tue, 09/04/2012 - 04:54 | 2759533 Zero Govt
Zero Govt's picture

have you ever listened to a Fed, ECB or Bank of England press conference all the way through?

it's like a Big Mac, instantly satisfying ingredients with loads of important trigger words then 10 minutes after... nothing! You can't remember a thing that was said, nutrional value zero, just a bit of gut-rot and indigestion left

Tue, 09/04/2012 - 05:25 | 2759528 Zero Govt
Zero Govt's picture

Moody's Downgrades European Union To Outlook Negative

Condolences to Jean-Claude Trichet and Mario Dracula at the ECB who've put in years of hard work to provide solid financial foundations and provide s t a b i l i t y

this news is 'unexpected' and a 'surprise' to us all, none of us could have seen this coming years ago and none of us can question your genius of applying more debt to 'solve' a debt problem

keep up the brilliant work at the ECB

Tue, 09/04/2012 - 05:47 | 2759563 Didn't build that
Didn&#039;t build that's picture

aargh..get on with it already...

the soviet EUnion is dead for all practical purposes

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