S&P just cut the credit rating of an entire continent

Downgraded, the lot of you.
Downgraded, the lot of you.
Image: AP Photo/Michel Euler
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Over the past two years, credit ratings agency Standard & Poor’s has downgraded Cyprus, France, Italy, the Netherlands, Malta and Spain. Today S&P stopped beating around the bush and simply downgraded the entire European Union. The EU lost its AAA rating, dropping to AA+. “We believe the financial profile of the EU has deteriorated, and that cohesion among EU members has lessened,” the agency said.

In reality, this is not as big of a deal as it might appear. As a borrower, bonds issued by the supranational bloc—currently worth around €56 billion ($76.5 billion), with the majority devoted to the Irish and Portuguese bailouts—pale in comparison to the size of the debts incurred by individual member states. Austria’s outstanding federal debt alone is worth nearly €180 billion, for example.

But the EU’s overall creditworthiness is, of course, underpinned by the health of its constituent parts. Thanks to recent downgrades, just under a third of the EU’s budget revenue now comes from AAA-rated countries, half the share contributed by top-rated sovereigns in 2007. A rancorous battle over the EU’s latest multi-year budget, which cut the revenue that the bloc receives from member states by 3.3% for 2014-20, is another reason why S&P cut the union’s credit rating.

The implications of S&P’s move, such as they are, will be more political than financial. EU leaders are in the midst of high-profile meetings about a purported “banking union” to backstop the region’s wobbly lenders. Despite the “historic” agreements trumpeted by leaders in recent days, the complexity of these deals to supervise, resolve and recapitalize ailing banks strikes many as so complex as to be unworkable. The biggest hitch is around a joint deposit guarantee scheme funded by all member states—until this is in place, individual governments will be responsible for bailing-out banks headquartered in their borders, even though most lenders do business across the region these days.

Thus, it is quite topical for S&P to choose today to express its doubts about the “cohesion” of the EU. But instead of shaming EU leaders into cooperating more closely, the timing of the announcement will probably only serve to harden the eurocrats’ opinion of the rating agency. European leaders are infuriated by the steady stream of downgrades to government debt—however warranted—and have imposed a welter of harsh new rules on ratings agencies in retaliation. By downgrading the European project itself, S&P will find Brussels even more hostile to its opinions than before.