Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or at minimum each six months in the cases of sovereign, sub-sovereign and supranational organisation issuers. Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key ratings assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the European Union and Euratom (AAA/Stable; S-1+/Stable) on 21 March 2022. This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated Annex accompanying this review, click here.

The European Union’s (EU) AAA rating reflects the supranational’s ‘excellent’ shareholder support and ‘excellent intrinsic strength.

The rating benefits from the largest European economies being the EU’s highly rated key member states, with a weighted average rating of AA-, the supranational’s track record and solid legal basis for receiving timely financial support and the extraordinary support mechanisms ensuring de facto joint and several support from the EU’s member states. In addition, the EU’s legally enshrined debt service priority combined with its meaningful budgetary flexibility to delay significant amounts of its annual expenditure provides further investor assurance.

The EU’s institutional profile is characterised by its record of excellent governance and irreplaceable mandate for its member states. Not only is it at the heart of Europe’s Covid-19 response, via the SURE and NGEU programmes, but it is also leading the continent’s transition towards a carbon-neutral and climate-resilient economy with its EUR 250bn green bond programme.

The EU’s financial profile benefits from a very strong liquidity profile driven by high, prudently managed liquid assets, excellent market access given its global benchmark issuers status, and a diversified funding base. The EU’s high asset quality reflects its direct lending mostly to EU sovereigns, the benefits conferred by its preferred creditor status and the resulting track record of zero non-performing loans.

Challenges, which are marginal at the AAA level, relate to the almost tenfold increase in outstanding liabilities anticipated over the coming years, which will result in higher debt repayments going forward, and the steady increase in outstanding guarantees, mostly to the European Investment Bank (AAA/Stable).

So far, of the potential EUR 800bn available under the NGEU programme for the EU-27 member states, the European Commission has provided a positive assessment of 22 recovery plans amounting to EUR 445bn (EUR 291bn in grants, EUR 154bn in loans). Only six sovereigns – Cyprus, Greece, Italy, Portugal, Romania and Slovenia – have requested loans to date, with the deadline for requesting loan support expiring on 31 August 2023.

In 2021, the EU raised EUR 71bn of long-term funding for NGEU and disbursed EUR 56.6bn of pre-financing payments to 21 member states. Regular payment requests are expected to be disbursed in the coming months, following the successful completion of milestones and targets by member states. The NGEU borrowing plan for the first half of 2022 amounts to EUR 50bn long-term bonds, of which EUR 10bn have already been raised, directly linked to disbursement needs estimated for the same period.

In addition, EUR 5.5bn of funding is estimated to be raised during the first half of 2022 for the EU’s other financing programmes, the EFSM, SURE and Macro-Financial Assistance (MFA). In February, the EU announced a proposal for a new emergency package for Ukraine (CCC/Under review for a developing outcome) of up to EUR 1.2bn. Half of the first EUR 600m tranche has been immediately disbursed on March 11, while the disbursement of the remaining part is expected still in March. A second tranche of EUR 600m will be disbursed later in the year. Including this last package, the EU has provided a total of EUR 6.2bn in MFA loans to Ukraine since 2014. Scope expects this MFA programme, and resulting funding volumes, to increase markedly in the context of the EU’s financial assistance to Ukraine over the coming years.

The Stable Outlook reflects Scope’s assessment of the EU’s financial buffers to withstand shocks. The rating could be downgraded if: i) highly rated key members states are downgraded; ii) the EU’s institutional setup weakened; and/or iii) the EU’s liquidity buffers declined.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Supranational Entities, 7 September 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Alvise Lennkh, Executive Director.

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