Rating action

Scope Ratings GmbH (Scope) has today affirmed the European Union’s and Euratom’s AAA long-term issuer and senior unsecured foreign-currency ratings, along with a short-term issuer rating of S-1+ in foreign currency. All Outlooks are Stable.

The AAA/Stable rating of the EU reflects: i) its highly-rated key Member States, a track record of and solid legal basis for receiving timely financial support, extraordinary support mechanisms that ensure de facto joint and several support from Member States, and a legally enshrined debt service priority; ii) an excellent institutional profile with an irreplaceable mandate for its Member States; and iii) an excellent liquidity and funding profile including high, prudently managed liquid assets and excellent market access given its global benchmark issuer status, as well as high asset quality combined with its preferred creditor status and negligible non-performing loans.

For the detailed rating report, click here.

Key rating drivers

Very strong support from Member States and a legally enshrined debt service priority

The EU’s borrowings are backed by the EU budget, which is mostly financed by GNI-based transfers from EU Member States, customs duties, VAT, and an own resource based on plastic packaging not recycled. The largest European economies – Germany (AAA/Stable), France (AA-/Stable), Italy (BBB+/Stable), Spain (A/Stable), Poland (A/Stable), the Netherlands (AAA/Stable), Sweden (AAA/Stable) and Belgium (AA-/Negative) – account for around 75%-80% of the EU’s economy, population and GNI-based national budgetary transfers and thus constitute the EU’s key Member States, with a weighted average rating of AA-. A possible one notch sovereign credit downgrade of Belgium to A+ would not impact the weighted average rating of AA-.

Scope highlights that the EU’s member support also includes extraordinary mechanisms that enhance its debt service ability. Debt is usually repaid using the proceeds of repayments from borrowing countries that received back-to-back loan financing. This layer of protection does not apply to grants paid out by the EU to member or non-member countries.

In case a borrowing country fails to repay its loan to the EU on time, or in the case of bond repayments related to direct grants, ‘the European Parliament, the [European] Council and the [European] Commission shall ensure that the financial means are made available to allow the [European] Union to fulfil its legal obligations in respect of third parties¹. Scope acknowledges this legal debt service priority to third parties, taking into account the budgetary flexibility of the European Commission to delay significant amounts of the EU’s annual expenditure of about EUR 40bn-60bn from the European regional and cohesion funds.

Moreover, if the EU’s available cash resources were insufficient to service debt, the European Commission would be legally entitled to draw funds from all Member States. In such an adverse event, which Scope deems unlikely, the required funding request ‘shall be divided among the Member States, as far as possible, in proportion to the estimated budget revenue from each of them². In addition, Member States are legally obliged to ‘execute the Commission’s payment orders following the Commission’s instructions and within not more than three working days of receipt³. In Scope’s opinion, this is an exceptionally strong and timely guarantee mechanism, with a de facto joint and several support framework that is unique among supranationals. These considerations provide the EU with a very strong institutional setup that underpins Scope’s assessment of the EU’s excellent member support.

Excellent institutional profile with an irreplaceable mandate for Member States

The EU benefits from its excellent governance and irreplaceable mandate for its Members, being at the forefront of the EU’s policy design and implementation. Programmes coordinated at EU level include assistance to countries in financial distress, programmes to close Europe’s investment gap, financial and policy support to facilitate the recovery from the Covid-19 and energy crises and measures to drive Europe’s transition to carbon neutrality. In response to the Covid-19 and energy crises, the EU’s financial activities and liabilities will increase almost tenfold from 2020 levels over the coming years to around EUR 975bn, or about 6% of the EU’s GDP, on account of SURE and NGEU. The SURE instrument was introduced to preserve employment during the pandemic and demonstrates the solidarity among EU Member States. It became the world’s largest social bond programme having raised EUR 98.4bn by its completion in December 2022.

In addition, at least 37% of the Recovery and Resilience Facility – which accounts for 90% of NGEU – is set for green investments. As a result, up to 30%, or EUR 215bn, of NGEU bond issuance will be directly linked to the objectives of a green and sustainable economic recovery. This is likely to transform the EU into the largest green bond issuer worldwide and underline its commitment to achieving its climate targets. To date, the EU has raised EUR 65.2bn via green bonds – all based on the EU’s Green Bond Framework, which is aligned with the green bond principles of the International Capital Market Association. These factors highlight the exceptional importance of the EU to its Member States and underpins Scope’s assessment of the EU’s excellent institutional profile.

Conservative liquidity management, excellent market access and high asset quality

The EU’s conservative liquidity management and budgetary practices result in high and stable liquid assets. Over the past nine years, the cash balance never dropped below EUR 10bn; the lowest recorded balance was EUR 7.4bn in July 2012. As of September 2024, cash stood at EUR 35.6bn. In addition to the cash balance, Scope’s calculation of the EU’s liquid assets also includes the budgetary margin. This refers to the difference between the maximum resources the EU can draw on from its Member States without the need for any subsequent decision by national authorities (the ‘own resources ceiling’) and the annual payment appropriations for EU expenditure. The own resources ceiling is legally binding, and it has never been reached. Thus, Scope has conservatively adjusted this margin for the pro-rata budgetary contributions of Member States rated AA- or above, currently at around 64%.

Critically, Member States decided to increase the own resources ceiling from 1.20% of the EU’s estimated GNI to 1.40%, to account for Brexit as well as potential sudden drops of the economy such as the one in 2020 prompted by the Covid-19 pandemic. In addition, Member States agreed to set aside a further 0.6pp until 2058 to cover repayment of all liabilities from NGEU borrowings. The total ceiling is thus 2.00% of the EU’s GNI, or about EUR 355bn for 2024.

The margin between the potential maximum Member State contribution of the EU’s highly rated members and the actual payments for the 2021-27 period – adjusted for ‘other revenues’ that increase the budgetary margin and the share of Member States rated AA- or above – averages around EUR 195bn over 2021-27. Together with the estimated average cash balance of EUR 30.5bn and the NGEU-specific liquidity account of around EUR 17bn, this results in liquid assets of around EUR 168bn for 2021-27.

Conversely, we estimate the EU’s liabilities materialising within 12 months to average EUR 165bn for 2021-27 and at around EUR 190bn for 2024. This includes bond repayments (EUR 45.2bn) and expected disbursements of EUR 145bn, driven mostly by NGEU (EUR 130bn). Looking ahead, Scope estimates that the EU’s disbursements will remain elevated, averaging around EUR 145bn each year during the 2021-26 period on account of NGEU. On this basis, Scope estimates the liquid assets ratio will average around 115% during 2021-27. Critically, once these large disbursements are made, the liquidity ratio will again increase gradually to above 240% in 2027, assuming no additional significant disbursements are made for other financial assistance programmes. These liquidity coverage estimates are very conservative however, as, contrary to most other supranationals, the EU does not face contractually binding disbursements and is therefore only committed to disburse funds after they are actually raised.

Looking further ahead, the EU will gradually repay its outstanding liabilities. Scope estimates that annual bond repayments due each year will likely amount to less than EUR 55bn, though actual figures are likely to be lower. Still, even this amount can be fully covered by the EU’s liquid assets due to the high cash balances and particularly because the own resources ceiling will remain elevated at 2.00% of the EU’s GNI until all bond repayments for the NGEU programme are made.

The EU’s financial profile also benefits from its excellent capital markets access. Scope notes that the EU’s debt securities benefit from preferential regulatory treatment including Level 1 HQLA assets designation for liquidity coverage requirements, 0% regulatory risk weighting under the Basel framework, preferential treatment under Solvency II, and eligibility for the European Central Bank’s asset purchase programmes and collateralised credit operations. SURE bonds are classified as social bonds under an ICMA-compliant Social Bond Framework, and NGEU green bonds are issued under an ICMA-compliant Green Bond Framework. The EU’s bond issuances for SURE and NGEU have benefited from extraordinary investor demand, being multiple times oversubscribed and resulting in favourable funding costs across the yield curve.

The EU’s financial profile is further supported by its high asset quality and excellent asset performance, reflecting its preferred creditor status and regionally diversified portfolio. The EU’s main risk exposure relates to financial assistance provided via SURE, NGEU, the European Financial Stabilisation Mechanism and the Ukraine-focussed financial support. Via these programmes, the sovereign exposures to Italy (BBB+/Stable), Portugal (A-/Positive), Ukraine (SD), Ireland (AA/Stable), Spain (A/Stable), Greece (BBB-/Positive), Poland (A/Stable) and Belgium (AA-/Negative) account for around 90% of the EU’s total direct loan exposure. Based on Scope’s sovereign ratings, this corresponds to a weighted-average borrower quality of around BBB. Looking ahead, Scope expects the EU’s asset quality to remain broadly unchanged; however, in the absence of additional loan disbursements, the EU’s country and concentration risk will markedly shift towards Italy and Spain starting in 2032, when NGEU loan repayment are scheduled to begin.

Credit challenges: significant increase in debt and high guarantees

The EU’s total borrowings are expected to increase almost tenfold from 2020 levels due to the SURE and NGEU programmes, to just under EUR 1trn by 2026 from EUR 93.2bn as of end-2020, and EUR 547bn as of September 2024. While this will solidify the EU’s position as the world’s largest supranational issuer, strengthen its ambition to create an EU safe asset, and provide Member States with a targeted, timely and temporary counter-cyclical fiscal stimulus, it also implies that future EU budgets will need to address significantly higher annual debt repayments.

Second, the EU’s ultimate credit risk also includes guarantees related to several funding programs with a guarantee ceiling totalling EUR 108.3bn. These relate to: i) the European Fund for Strategic Investments (EFSI) with a guarantee ceiling of EUR 25.6bn, ii) the InvestEU programme with a guarantee ceiling of EUR 25.8bn, iii) guarantees for the EIB’s non-EU activities under the External Lending Mandate (ELM) with a guarantee ceiling of EUR 27.7bn, iv) the European Fund for Sustainable Development (EFSD) with a guarantee ceiling of EUR 1.1bn, and v) the Neighbourhood, Development and International Cooperation Instrument (NDICI) which includes the European Fund for Sustainable Development Plus (EFSD+) with a guarantee ceiling of EUR 28.1bn.

Scope highlights that the overall size of guarantees has increased substantially from around EUR 60bn in 2021 to EUR 108bn at end-2023 due to the introduction of the InvestEU and EFSD+ programmes. Still, Scope notes that the risk borne by the EU budget is significantly curtailed by the assets of the related guarantee funds, which are combined in the Common Provisioning Fund. As of end-2023, assets in the fund stood at EUR 18.8bn, resulting in a high provisioning rate which would absorb any losses before resources would need to be drawn from the EU budget.

Finally, Scope also notes that exceptional MFA loans to Ukraine (SD) since the start of the Russia-Ukraine war are provisioned for at a high level of 70%. Of this, 9% relates to paid-in provisioning from the EU budget and 61% to callable guarantees from Member States. The EU’s direct loan exposure amounted to almost EUR 30bn at end-2023. The EU, its Member States and European Financial Institutions have together provided EUR 118.3bn in grants and loans to date. The most recent support programs will lead to rising exposures to Ukraine including via the EUR 50bn Ukraine Facility and the proposed EUR 35bn MFA loan, which remains dependent on participation of G7 partners, funded through extraordinary profits from immobilised Russian assets.

Outlook and rating sensitivities

The Stable Outlook represents Scope’s view that risks to the ratings over the next 12 to 18 months are balanced.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. highly rated key Member States were downgraded;
    
2. the EU’s institutional setup weakened; and/or
    
3. liquidity buffers were significantly reduced.

Factoring of environment, social and governance (ESG)

Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. ESG factors are explicitly captured in Scope’s assessment of the institutional profile, which Scope assesses as ‘Excellent’ for the EU.

Supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘aaa’ rating for the EU. Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect the creditworthiness of the issuer.

No adjustment was made to the indicative rating of the EU.

A rating committee has discussed and confirmed these results.

For further details, please see Appendix II of the rating report.
 
Rating Committee
The main points discussed by the rating committee were: i) institutional profile; ii) financial profile, including asset quality, liquidity and funding; iii) member state support; iv) additional considerations; and viii) consideration of peers.

Rating driver references
1. Treaty on the Functioning of the European Union. Article 323
2.  Article 14 (4) of the Council Regulation (EU, Euratom) No. 609/2014
3. Article 15 (1) of the Council Regulation (EU, Euratom) No. 609/2014

Methodology
The methodology used for these Credit Ratings and/or Outlooks (Supranational Rating Methodology, 21 June 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
 
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Eiko Sievert, Senior Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 1 February 2019. The Credit Ratings/Outlooks were last updated on 1 September 2023.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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