EU credit rating put on negative outlook by Moody's
by Daniel Mason
The European Union has been put on notice that its top notch credit rating could be downgraded by Moody's if the ratings of key member states are lowered.
Last night Moody's said it had changed its outlook in the EU's Aaa rating from stable to negative to reflect the outlooks assigned to a number of major contributors to the bloc's budget. Germany, France, the Netherlands and the United Kingdom together account for 45 per cent of the EU budget and all were handed negative outlooks on their Aaa ratings by Moody's earlier this year.
The rating agency said in a statement that all four were "exposed, albeit to varying degrees, to the euro area debt crisis", adding: "Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering the significant linkages between member states and the EU."
It noted that member states would "likely not prioritise their commitment to backstop the EU's debt obligations over the service of their own debt obligations." A full downgrade could follow for the EU if the credit standing of any of those key member states deteriorates further, Moody's warned.
"Additionally, a weakening of the commitment of the member states to the EU and changes to the EU's fiscal framework that led to less conservative budget management would be credit negative," it said. On the other hand if the ratings of the member states were returned to a stable outlook the EU could follow.
Meanwhile in a further setback for the eurozone, Bulgaria has put plans to join the single currency on hold. In an interview with the Wall Street Journal, finance minister Simeon Djankov said: "I don't see any benefits of entering the eurozone, only costs." He added that it was "too risky for us and it's also not certain what the rules are and what they are likely to be on one year or two".
Bulgaria joined the EU in 2007 and is its poorest member – but with a budget deficit of 2.1 per cent of gross domestic product last year, already meets the criteria for entering the European exchange rate mechanism II, the stage prior to joining the euro.
All member states that are not part of the single currency, except the UK and Denmark, are required to join as a condition of EU membership – but the attraction of becoming part of the club has lessened as result of the crisis, with Poland and Lithuania also among those to cool their interest.
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