S&P strips EU of its top AAA credit rating

The Standard and Poor’s ratings agency downgraded the European Union’s credit-worthiness by one notch, blaming threats to cohesion including Britain’s role in curtailing budgets and holding a membership referendum.

But Brussels angrily slapped down the agency’s decision to slash its long-term debt rating from “AAA” to “AA+,” saying the grounds cited were “questionable.”

S&P made the announcement just as EU leaders were holding a summit marking a big political step forward with an agreement on a banking union intended eventually to ring-fence failing banks from bringing down an entire economy as happened in Ireland.

The ensuing crisis forced the bloc to step in with billions in funds to bail out entire economies, putting national budgets under constraints and exposing an endemic debt problem in some countries such as France and Italy.

Explaining its decision, the agency said: “In our view, EU budgetary negotiations have become more contentious signaling what we consider to be rising risks to the support of the EU from some member states.”

“The downgrade reflects our view of the overall weaker creditworthiness of the EU’s member states. We believe the financial profile of the EU has deteriorated, and that cohesion among EU members has lessened.”

Brussels disputed S&P’s action, saying the EU’s credit-worthiness should be assessed on its “own merit” as the bloc’s budget benefits from a special treaty status and runs neither a deficit nor debt.

Member states are also bound to “always balance the EU budget,” EU Economic Affairs Commissioner Olli Rehn said.

“The commission disagrees with S&P that member state obligations to the budget in a stress scenario are questionable.

All member states have always and also throughout the financial crisis provided their expected contributions to the budget in full and in time,” he said.

Since the S&P put a negative outlook on the EU in January 2012, it has downgraded ratings for a number of members and in November cut the “AAA” of the Netherlands, leaving just six EU countries with top ratings.

This meant that since 2007, the overall contribution of AAA-rated countries to EU revenues had nearly halved to 31.6 percent.

The agency said that the EU had made outstanding loans of 56 billion euros ($76 billion), and the average life of the loans was likely to rise from 12.5 years to 19.5 years, with Ireland and Portugal accounting for 80 percent of the total.

S&P warned that the financial guarantees and budgetary contributions were “joint and several obligations of EU members.”

It said that “we believe, however, that the willingness of the remaining ‘AAA’ rated sovereigns to fulfill this joint and several pledge might be tested should some other members be unwilling to provide the funds on a pro-rata basis.”

S&P’s said that the latest EU budget, approved earlier this month, had the effect of reducing sharply the room for maneuver within the budget ceiling.

In an indirect reference to some countries including Britain, S&P said that during the budget negotiations, non-eurozone members of the EU “which are typically AAA rated,” argued for a reduction in budgetary payments.

“This relatively small number of EU members was able to determine at least a temporary limit to the EU’s budget; we see the possibility that negotiations may be reopened.”

In addition, some EU countries continued to question a special budget rebate for Britain which was set to call a referendum on EU membership, “the first time in the EU’s history that a sitting government has proposed such a step.”

S&P said that pressure for a further downgrade could increase if the ratings of top-quality EU countries fell more than expected, if future EU budget negotiations turned more “acrimonious,” “if members apply to leave the EU, or if its financial parameters markedly deteriorate.”

The landmark bank regulation deal reached just before the summit includes a single body to police and wind up ailing banks, backed by a fund paid for by the banks themselves to avoid using taxpayer money.

All 17 countries — soon to be 18 with Latvia joining next month — sharing the euro will be bound to the scheme, while non-euro members have the option of joining.