S&P Warns on Possible Downgrade of EU, Banks

If member states are cut, downgrade could raise rescue costs

Standard & Poor's, continuing a theme it began earlier this week, said Wednesday that the European Union itself could face the loss of its AAA credit rating, as could large euro zone banks, if member nations of the EU are downgraded as a result of leaders' failure to act decisively at a summit meeting on the debt crisis.

The warning came after a similar warning on Monday, when S&P threatened to downgrade 15 of the 17 euro zone nations.

Reuters reported that while an S&P spokesman said a cut of one notch to the EU's rating would have no effect on EU countries that aren’t part of the euro zone, it could make EU borrowing more expensive for rescue packages to assist weaker member states.

S&P also warned, as a follow-on to Monday's action, that some of the euro zone's biggest banks, such as Commerzbank, Société Générale, Crédit Agricole, BNP Paribas and Deutsche Bank, could also have their ratings cut if euro zone countries were downgraded.

Euro zone members of the EU kicked in approximately 62% of the revenues budgeted by the EU for 2011, according to the ratings agency, which put the EU credit rating on credit watch negative.

In their report, S&P analysts Frank Gil and Moritz Kraemer said: "Our review will focus on the financial ability of euro zone member states to support the EU's debt service should the institution face a period of financial distress." They added, "The CreditWatch placement on the eurozone member states was prompted by our concerns about the potential impact on these member states of what we view as deepening political, financial, and monetary problems within the eurozone."

Downgrades to euro zone countries, which could make it more difficult for them to contribute their shares, may result in a drop of one notch for the EU. Both the EU and the European Atomic Energy Community participate in a joint program to finance member states by means of issuance of up to 80 billion euros ($107.248 billion) in medium-term notes. In order to do this, they borrow on capital markets. A change in rating would increase costs for this as well.

Reprints Discuss this story
This is where the comments go.