Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic 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 rating’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 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 Stability Mechanism (long-term foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term foreign-currency issuer ratings: S-1+/Stable) on 14 January 2025.

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 rating annex accompanying this review, please see here.

The European Stability Mechanism’s (ESM) AAA/Stable ratings reflect the supranational’s excellent intrinsic strength and shareholder support driven by its strong governance, significant capitalisation, and important mandate for its shareholders as a crisis resolution mechanism, underlining its central role within the Economic and Monetary Union of the European Union.

The signing of a Memorandum of Cooperation in May 2024 between the ESM and European Parliament, further enhances the regular dialogue with the European Parliament’s Committee on Economic and Monetary Affairs (ECON). In 2021, the finance ministers of the Eurogroup signed amendments to the ESM treaty confirming the adoption of the ESM reform. Italy remains the only ESM member not to have ratified the revised treaty, with the country’s lower house of parliament voting against ratification on 21 December 2023. Scope still expects an eventual ratification of the treaty change. When finalised, the ESM will have a bigger role in the design of future euro area stability programmes, further reinforcing the importance of its mandate to its shareholders.

The ESM benefits from very high capitalisation with paid-in capital of EUR 81bn, the highest among its peers, resulting in an exceptionally high capacity to absorb losses on existing loans. In addition, the ESM’s intrinsic profile is further driven by very high and well-diversified liquidity buffers, and very strong capital market access. ESM issuances are designated as Level 1 high-quality liquid assets and granted a 0% risk weighting under the Basel framework and are included in several SSA and government bond indices. This preferential regulatory treatment of ESM issuances together with its strong shareholder and capital base has allowed the ESM to establish itself as a European benchmark issuer. By September 2024, the ESM had completed its 2024 long-term funding programme of EUR 6bn, with issuance expected to rise to EUR 7bn in 2025. As part of its strategy to diversify its funding instruments, the ESM also introduced its EUR 20bn Euro Commercial Paper programme in February 2024. This is in addition to the existing bills and bonds programmes traditionally issued.

The ESM’s mandate to lend to crisis-hit countries results in a highly concentrated borrower base and weak profitability. As a lender of last resort, the ESM’s loans benefit from preferred creditor status, junior only to the International Monetary Fund. Loans were granted under strict conditionality and are subject to monitoring of the sovereign’s capacity to repay, in the context of the ESM’s Early Warning System. The loan portfolio exposures at end-2024 are to Greece (BBB/Stable) of EUR 59.8bn, Spain (A/Stable) of EUR 11.9bn, and Cyprus (A-/Stable) of EUR 6.3bn. This distribution results in a weighted average borrower quality of BBB+, up from B+ in 2016, particularly reflecting the gradual improvement of Greece’s sovereign debt rating. The ESM’s three borrowers have so far repaid in full and on time, with Spain making early repayments of EUR 17.6bn over 2014-18, before its first scheduled principal repayment in 2022, and the final repayment expected in 2027. Cyprus will start repaying in 2025 until 2031 while Greece’s scheduled repayments will take place between 2034 and 2060.

The Stable Outlook reflects Scope’s view that risks are balanced over the next 12 to 18 months. The ratings/Outlooks could be downgraded if, individually or collectively: i) liquidity buffers were significantly reduced; ii) the capital base weakened significantly due to sustained losses caused by missed borrower payments and/or a material increase in the maximum lending capacity; and/or iii) the asset quality of the loan portfolio deteriorated significantly.
 
The methodology applicable for the reviewed ratings and/or rating Outlooks (Supranational Rating Methodology, 21 June 2024) 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, Senior Director

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