Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

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 ratings’ 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, including key rating assumptions and model. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the European Union and Euratom (long-term issuer and senior unsecured foreign-currency debt ratings: AAA/Stable; short-term issuer foreign-currency rating: S-1+/Stable) on 28 February 2023.

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 rating history can be found on www.scoperatings.com.

Key rating factors

For the updated Annex accompanying this review, click here.

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

The rating benefits from the EU’s largest member states having a high 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 EU member states. The EU’s legally enshrined debt service priority combined with its meaningful budgetary flexibility to delay significant amounts of 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 has it been 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, and the steady increase in outstanding guarantees, mostly to the European Investment Bank (AAA/Stable).

So far, the European Commission has provided a positive assessment for all EU-27 member states’ recovery plans, amounting to EUR 500.5bn (EUR 335.1bn in grants and EUR 165.4bn in loans) out of a potential EUR 800bn. Only seven sovereigns – Cyprus, Greece, Italy, Poland, Portugal, Romania and Slovenia – have requested loans to date, with the deadline for requests expiring on 31 August 2023. Following the escalation of the Russia-Ukraine war, the REPowerEU regulation entered into force in February 2023 which will allow member states to add a new REPowerEU chapter to their national recovery and resilience plans under NGEU. This will allow the financing of key investments and reforms aimed at strengthening the strategic autonomy of the EU by diversifying its energy supplies and is likely to result in a higher uptake of loans going forward.

As of January 2023, EUR 344bn in EU bonds were outstanding, with most of the proceeds allocated to NGEU (52%). To date, EUR 144bn of loans and grants under the Recovery and Resiliency Facility (including pre-financing payments) have been disbursed to 22 member states. More regular disbursements are expected in the coming months following the completion of milestones and targets by member states. The NGEU borrowing plan for H1 2023 amounts to EUR 80bn in long-term bonds, of which EUR 20.3bn have already been raised in January. Long-term bond issuances are directly linked to disbursements estimated for the same period, mostly under the NGEU programme, accounting for around EUR 70bn of expected H1 2023 borrowings. Since January 2023 the EU has adopted a new funding strategy (the EU unified funding approach) to issue single-branded EU bonds, rather than issuing them under separate programmes. Proceeds will be collected in a central funding pool and subsequently allocated to the various funding programmes. This will contribute to making EU bonds more liquid and support a more homogeneous secondary market by avoiding fragmentation in issuances.

Of the EUR 80bn of funding estimated to be raised during H1 2023, around EUR 10bn is earmarked for the new Macro-Financial Assistance Plus (MFA+) programme for Ukraine (CC/Negative) to provide economic, social and financial support, adopted in December 2022. The programme will make up to EUR 18bn available in 2023; EUR 3bn were disbursed in January. Other MFA programmes provided EUR 7.2bn of loans and EUR 620m in budget support to Ukraine between March and December 2022.

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

The methodology applicable for the reviewed ratings and/or rating Outlooks (Supranational Rating Methodology, 11 August 2022) 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: Eiko Sievert, Director

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