The European Union (EU) saw its ratings outlook cut late Monday by Moody’s, after the ratings agency warned that risks to its four biggest budget contributors could take the whole group down.
Bloomberg reported Tuesday that Moody’s took the action on the EU’s Aaa rating, citing its recent outlook cuts to France, Germany, the U.K. and the Netherlands. Since those four countries make up about 45% of the EU’s budget contributions, any change in their status would have a disproportionate effect on the overall body of nations.
Moody’s released a statement in Frankfurt late on Monday that detailed its actions, which included dropping the outlook on the EU’s Aaa long-term bond rating to negative from stable and also cutting from stable to negative the agency’s outlook on the EU’s medium-term note program, which carries a provisional Aaa rating.
Moody’s said in its statement that downgrade risks to the EU’s rating come from “deterioration in the creditworthiness of EU member states. 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.”
While the agency also said that a change for the better in the four member states’ risk status could also result in an improved outlook for the EU as a whole, it added, “Moody’s believes that it is reasonable to assume the same probability of default by the EU on its debt obligations as the highest rated key members states’ probability of default.”
While the agency acknowledged “that there are structural features in place that enhance the EU’s creditworthiness, they are in Moody’s view not sufficient to delink the EU’s ratings from the ratings of its strongest key member states.”