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/ies, including key rating 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 (long-term issuer and senior unsecured foreign-currency debt ratings: AAA/Stable; short-term issuer foreign-currency ratings: S-1+/Stable) on 20 February 2024. 

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

The AAA rating of the European Union (EU) reflects the supranational’s ‘very strong’ Member 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 its irreplaceable mandate for its Member States. It played a key role in Europe’s response to Covid-19 and the energy crisis via the SURE and NGEU programmes and is leading the continent’s transition towards a carbon-neutral and climate-resilient economy. The target of issuing around 30% of NGEU bonds, or up to EUR 250bn, as green bonds is expected to make the EU the world’s largest green bond issuer.

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

Challenges, which are marginal at the AAA level, relate to an almost tenfold increase from 2020 levels in outstanding debt anticipated over the coming years, which will result in higher debt repayments going forward, and a steady increase in outstanding guarantees, mostly to the European Investment Bank (AAA/Stable).

To date, the European Commission and the Council of the European Union have endorsed all EU-27 member states’ modified recovery plans, reflecting a total amount of resources of EUR 647.3bn (EUR 356.7bn in grants and EUR 290.6bn in loans), out of a potential EUR 723bn. In addition to modified allocations of grants and loans – with loan allocations now requested by 13 sovereigns – the updated versions of national recovery plans also include the REPowerEU chapter for most of the member states. This additional programme will allow the financing of key investments and reforms aimed at strengthening the strategic autonomy of the EU by diversifying its energy supplies.

As of end-January 2024, EUR 455bn in EU bonds were outstanding, with most of the proceeds allocated to NGEU (61%). To date, around EUR 220bn of loans and grants under the Recovery and Resiliency Facility (including pre-financing payments) have been disbursed to 24 member states. More regular disbursements are expected in the coming months following the completion of milestones and targets by member states. The borrowing plan for H1 2024 amounts to EUR 75bn via both conventional and NGEU Green long-term bonds, of which EUR 17.03bn have already been raised as of February 5, 2024. Long-term bond issuances are directly linked to disbursements estimated for the same period, mostly under the NGEU programme, including possible payments under REPowerEU. 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 are collected in a central funding pool and subsequently allocated to the various funding programmes. This contributes to making EU bonds more liquid and supports a more homogeneous secondary market by avoiding fragmentation in issuances.

At the end of November 2023, the Council of the European Union approved the 2024 budget, including commitments for EUR 189.4bn and payments for EUR 142.6bn. The new budget aims to continue supporting the economic recovery while strengthening Europe’s strategic autonomy, addressing the most urgent consequences of the crisis in the Middle East, while continuing to prioritise green and digital spending.

In addition, in February 2024 the EU Commission agreed on the first ever revision of the Multiannual Financial Framework (MFF)’s ceilings for 2021-2027, after the proposed revision presented in June 2023 on the back of the unprecedent and unexpected challenges the EU has been facing since the MFF’s adoption in 2020. The proposed measures include mechanisms to finance rising interest expenses and the establishment of a new Ukraine Facility. The new facility will provide grants, loans and guarantees, with an overall capacity of EUR 50bn over 2024-27 to support Ukraine’s immediate needs, recovery and modernisation. Up to EUR 33bn of the Facility will be funded via EU-bond issuance. Over 2022-23 the EU has provided EUR 25.2bn to Ukraine in response to the Russia’s invasion in the form of macro-financial assistance (MFA), including EUR 7.2bn in MFA loans and EUR 18bn in concessional MFA+ loans.

The Stable Outlook reflects Scope’s assessment of the EU’s financial buffers to withstand shocks. The rating could be downgraded if, individually or collectively: 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. 

For the updated Rating Report accompanying this review, click here.
 
The methodology applicable for the reviewed ratings and/or rating Outlooks (Supranational Rating Methodology, 3 August 2023) 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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