Rating action

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

Scope’s AAA rating on the ESM reflects the supranational’s substantial capital position, very high liquidity buffers, excellent capital markets access and highly rated key shareholders. The ESM’s mandate to lend to crisis-hit countries results in a highly concentrated borrower base. Its shareholder base, the euro area members, is also concentrated compared to peers.

The ESM’s mandate and its high importance to shareholders underpin its credit profile. However, the completion of the ratification process of the revised ESM treaty, which would enhance and expand the ESM’s mandate, remains uncertain. Alongside other reforms, the ESM would provide a backstop of up to EUR 68bn in loans to the Single Resolution Fund (SRF).

The ESM treaty reform was agreed upon in principle in 2018 and signed by ESM member countries in early 2021, launching the ratification process by national parliaments. All member states but Italy have ratified the treaty reform. The country’s lower house of parliament voted against ratification in December 2023 and limited political progress has been made since. Absent reform to the ESM treaty, Scope continues to view the ESM’s mandate to safeguard financial stability in the euro area as highly relevant for its members.

Find the updated Rating Report here.

Rating rationale

Substantial capital position and very strong capital call mechanism

The ESM’s capitalisation is excellent and reflects an exceptionally high capacity to absorb losses. Scope uses an implied leverage ratio to assess capitalisation levels under the assumption that the maximum lending capacity of EUR 500bn is used as per the ESM treaty. For the numerator of this ratio, Scope includes paid-in capital (EUR 80.7bn), accumulated reserves and retained earnings (EUR 5.2bn) as well as 10% of the callable capital of highly rated shareholders (AA- or above), capped at 30% of total capital, which stood at EUR 36.8bn.

Thus, total capital amounted to EUR 122.7bn at YE 2024, resulting in an implied capitalisation ratio of 24.5%, which compares favourably to peers reflecting the institution’s high paid-in capital. The ESM’s actual capitalisation ratio, based on disbursed loans of around EUR 78.0bn at YE 2024, stood at 157.4%, which is one of the highest levels among rated peers and reflects the significant undisbursed portion of the ESM’s maximum lending capacity.

The ESM further benefits from continued earnings retention, supporting a gradual build-up of resources. The ESM was profitable every year since inception until 2021, albeit with relatively low average return on equity of 0.2% between 2017-21. This reflects the institution’s non-profit-maximising mandate and pricing policy, its large equity base and conservative investment rules, but also the then-prevailing low interest rates.

The ESM recorded its first annual net loss of a moderate EUR 60.2m in 2022, due to realised losses of sales of debt securities to reposition the investment portfolio in line with its risk appetite and within the context of rapidly rising interest rates. However, fully offsetting this one-off loss, the ESM posted a record net income of EUR 1.8bn in 2024 (return on equity of 1.5%) and EUR 0.3bn in 2023 (0.3%), reflecting improving interest rate margins earned on its sizeable investment portfolio, and declining realised losses of sales of debt securities. In 2025, earnings performance should continue to benefit from higher prevailing interest rates.

Finally, the ESM benefits from sizeable callable capital and a very strong and transparent capital call mechanism. The ESM Managing Director can make an emergency capital call, which requires ESM members to irrevocably and unconditionally honour the call within seven days, without prior approval from the ESM’s governing bodies. An emergency capital call can only be made if needed to avoid a default on any scheduled or other payment obligation due to creditors.

Additionally, capital can be called by the Board of Governors by mutual agreement at any time, and by the Board of Directors with a simple majority to cover losses from ESM operations under specific conditions under Article 9(2) of the ESM treaty.

Very high liquidity buffers, conservative investment policies and excellent capital market access

The ESM benefits from exceptionally high and well-diversified liquidity buffers given the institution’s conservative and comprehensive investment guidelines and liquidity risk management. Scope estimates the ESM’s liquid assets at around EUR 94.3bn for end-2024, which includes cash and cash equivalents of EUR 14.1bn (EUR 17.1bn at YE 2023), highly rated debt securities of EUR 72.9bn (EUR 69.1bn at YE 2023) with a minimum rating of AA- and deposits of EUR 7.3bn (EUR 4.1bn at YE 2023). Conversely, liabilities due within a year amounted to around EUR 26.3bn, while no further loans have been disbursed since 2018. On this basis, Scope calculates a weighted average liquid assets ratio for the three years during 2022-24 of around 357%. This is the highest liquidity coverage ratio among rated peer supranationals.

The ESM’s capital market access is also excellent. 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 together with its strong shareholder and capital base has allowed the ESM to establish itself as a European benchmark issuer.

The ESM/EFSF’s broadly diversified investor base provides a stable source of funding, resulting in favourable funding rates and hence lending rates. The ESM’s annual funding needs are EUR 7bn in 2025 and 2026. Recently, the share of investors from Asia has increased, pointing to the ESM’s globally diversified funding strategy. Should the need for more funding arise, Scope expects the ESM to have no difficulty raising higher volumes at favourable rates, given its established capital markets presence. As part of its strategy to diversify its funding instruments, the ESM has also issued in USD in addition to its traditional funding currency in EUR, with proceeds swapped back to EUR, and introduced a EUR 20bn Euro Commercial Paper programme in February 2024. This is in addition to the existing bills and bonds programmes traditionally issued.

Preferred credit status, improving asset quality, and excellent asset performance

As a lender of last resort, the ESM’s loans benefit from preferred creditor status, junior only to the International Monetary Fund. Outstanding loans, amounting to EUR 78.0bn at end-2024, 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 (EWS).

Loan exposures as of June 2025 were to Greece (BBB/Stable) of EUR 59.6bn, 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. This reflects the improving credit quality of ESM beneficiary members states, with Greece upgraded to BBB/Stable in December 2024, Spain to A/Stable in September 2024 and Cyprus to A-/Stable in October 2024. Scope expects robust economic growth for the three beneficiary member states, with average real GDP growth of 2.4% in 2025 and 2.1% in 2026, above the respective euro area average of 1.1% and 1.5%. Additionally, Scope expects continued medium-term debt reduction for all three sovereigns, further underpinning the ESM’s asset quality.

The ESM has been repaid in full and on time by its three borrowers and has thus never recorded a non-performing loan. Spain has repaid EUR 29.5bn of its total financial assistance of EUR 41.3bn, via nine early repayments and scheduled repayments since 2022, and is scheduled to repay its remaining loans of EUR 11.9bn by 2027. Repayments from Cyprus will start in 2025, with the final payment due in 2031. Finally, Greece’s repayments will be due between 2034 and 2060.

Highly rated key shareholders and important institutional mandate

The four largest euro area economies – Germany (AAA/Stable), France (AA-/Stable), Italy (BBB+/Stable) and Spain (A/Stable) – jointly account for around 76% of the ESM’s subscribed capital. These sovereigns thus constitute the ESM’s key shareholders, with a weighted average rating of AA-. The ESM’s key shareholder rating was not impacted by Scope’s downgrade of France’s long-term issuer rating to AA-/Stable from AA/Negative in October 2024. A drop in the average key shareholder rating to A+, which would require either a one-notch downgrade of Germany or at least two one-notch downgrades of any other key shareholder, would not impact the ESM’s AAA rating, all other things being equal.

Credit challenges: concentrated shareholder base and loan portfolio, potential equity exposure

First, the ESM’s shareholder base is highly concentrated compared to other supranationals. While some decisions in the Board of Governors require unanimity (or mutual agreement), for example, to provide stability support or change the list of financial instruments, the largest shareholders have a blocking majority in some decisions taken by the ESM’s board of governors that require a qualified majority of 80% of votes cast, such as appointing the Managing Director.

Additionally, despite the benefits afforded by the substantial callable capital of its highly rated shareholders, a concentrated shareholder base increases the dependence on any one shareholder’s ability to honour capital calls.

Still, the concentrated shareholder structure is balanced by the ESM’s excellent governance 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. Similarly, while no capital call has ever been made, Scope believes shareholders would be willing to honour such a capital call given their ownership and control of the institution.

Second, the ESM was set up to provide financial assistance to crisis-hit countries in the euro area. Current outstanding loans are to three countries resulting in a highly concentrated loan portfolio, in line with its mandate.

Finally, Scope notes that under very strict conditions, the ESM can also invest directly into bank equity via direct recapitalisations. This instrument poses a significantly higher asset quality risk than the granting of loans but has not been used to date and will be terminated once the ESM functions as the backstop to the SRF following the full ratification of the treaty reform. Once adopted, the ESM will instead be able to provide a EUR 68bn credit line to the SRF, which would expose the ESM to the SRF’s credit quality rather than directly to any bank. This facility poses a lower risk than direct investments in bank equity because the SRF relies on payment contributions from banks relative to their covered deposits, size, business model and other risk characteristics.

Rating-change drivers

The Stable Outlook reflects Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are balanced.

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

1. liquidity buffers were significantly reduced;
    
2. the capital base weakened significantly due to sustained losses caused by missed borrower payments and/or a material increase in the maximum lending capacity;
    
3. the asset quality of the loan portfolio deteriorated significantly.

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 ‘Strong’ for the ESM, and the assessment of potential climate risks under the portfolio quality assessment.

Supranational scorecard

Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘aaa’ rating for the ESM. 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 ESM.

A rating committee has discussed and confirmed these results.

For further details, please see Annex II of the rating report.

Rating Committee
The main points discussed by the rating committee were: i) institutional profile; ii) financial profile, including capitalisation, asset quality, liquidity and funding; iii) shareholder support; iv) additional considerations; and viii) consideration of peers.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Supranational Rating Methodology, 23 May 2025), 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 8 May 2020. The Credit Ratings/Outlooks were last updated on 19 July 2024.

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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