By Peter Nurse
Reuters
Less-than-festive seasons greetings arrived at the Brussels HQ of the European Union courtesy of Standard & Poor’s this morning, which slapped a downgrade on the EU’s supranational long-term rating to AA+ from AAA.
Cue a kneejerk “bad news is bad news” reaction from the markets? Hardly.
Stock markets are actually trading higher and the euro just a touch lower against the U.S. dollar, as the dominant influence continues to be Wednesday’s ‘soft taper’ by the Federal Reserve.
So what’s behind the market’s apathy?
For one thing the credit rating agencies as a whole may well be losing their power to shock.
As Belgian Prime Minister Elio di Rupo noted on his way into an EU leaders meeting in Brussels:
“Let’s not forget this is an analysis done by the experts who, right before the banking crisis, were saying everything was fine. An opinion is just an opinion. We need to pursue a policy of growth. It’s the first time since I started coming to EU summits there are positive signs, we need to continue this work.”
Also, S&P was at pains to point out this shift doesn’t actually affect the sovereign ratings of individual member countries. And it’s worth remembering that there aren’t that many AAA euro-zone rates countries left anyway, as we pointed out in late November, with just Germany, Luxembourg and Finland still in the club rated AAA by all three major ratings agencies. Fitch and Moody’s still rate the EU AAA.
And, as Landesbank Baden-Württemberg points out, the EU is a political construct which enjoys strong support among its member states. And it’s those member states that are liable for obligations arising from the budget. On top of this, the EU enjoys preferred creditor status.
European Union Vice-President Olli Rehn said in a statement this morning: “The Commission disagrees with S&P that MS obligations to the Budget in a stress scenario are questionable. All MS have always and also throughout the financial crisis provided their expected contributions to the budget in full and in time.”
With all this in mind, it’s doubtful the EU will have any difficulty borrowing on the capital markets to fund lending to such esteemed programs as the European Atomic Energy Community.