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S&P cuts EU's AAA rating, European officials dismiss move

The European flag flies outside of the La Canada shopping centre in Marbella, southern Spain January 23, 2013. REUTERS/Jon Nazca
The European flag flies outside of the La Canada shopping centre in Marbella, southern Spain January 23, 2013. REUTERS/Jon Nazca

By Luke Baker

BRUSSELS (Reuters) - Credit agency Standard & Poor's cut its triple-A rating of the European Union by one notch on Friday, saying it had concerns about how the bloc's budget was financed, a view EU leaders and other officials dismissed as misguided.

S&P's announcement came the day after the EU reached a deal to overhaul the region's banking sector, an agreement many commentators said fell short of expectations, although S&P said it had not factored into its credit assessment.

"In our opinion, the overall creditworthiness of the now 28 European Union member states has declined," the rating agency said in a statement that came 11 months after it announced it had a 'negative' outlook on the bloc.

"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."

European officials said they were not surprised by the move to AA+ since S&P recently downgraded the Netherlands and has lowered its view on six other member states - France, Italy, Spain, Malta, Slovenia and Cyprus - in the past year.

But they pointed out that the EU has no debt or deficit to speak of and its budget is a stand-alone entity financed by 28 countries, making it one of the most stable institutions and most reliable borrowers in the world.

"We must put it in perspective," Belgian Prime Minister Elio di Rupo told reporters as he arrived for an EU summit in Brussels. "It's just an opinion."

Italian Prime Minister Enrico Letta said the decision shouldn't be ignored and showed that Europe's economic crisis was not yet over.

Others were more withering in their reaction, questioning the expertise of S&P and other ratings agencies, which have been critical of the EU throughout a four-year debt crisis.

"I've met some of the so-called experts from the ratings agencies and really you have to wonder. What have they got right?" asked one senior official with knowledge of the EU budgetary process, speaking on condition of anonymity.

"Two years ago they were saying Greece would end up leaving the euro zone. They were completely wrong. Shouldn't they have to acknowledge their mistakes?"

Others questioned whether S&P understood the financial underpinnings of the EU budget, which is administered by the European Commission, saying it should be assessed independently, not as the average of 28 countries' ratings.

Olli Rehn, the commissioner for economic and monetary affairs, pointed out that all EU member states had always provided their contributions to the budget, even during the financial crisis.

In its statement, S&P said cohesion among EU member states had weakened and that some countries might baulk at funding their contributions to the budget in the years ahead.

The budget is financed by contributions from all member states based on gross domestic product. It is set for seven-year periods, although there is also an annual negotiation to decide on the precise spending for the next year.

The most recent seven-year budget, which runs from 2014-2020, was agreed in December and sets a spending ceiling of around 1 trillion euros, equivalent to slightly less than one percent of total EU output.

S&P said it was concerned about the commitment of some member states to continue funding their portion of the budget on a 'pro-rata' basis. Later in the statement it mentioned Britain, which has fought to keep the EU budget down, although it has never suggested it may not pay its portion.

Britain plans to hold an 'in-out' referendum on its EU membership in 2017, a vote that could end up destabilizing the union and worsen its financial stability, the agency said.

"We believe... 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," it noted.

The EU is not a sovereign but it can borrow in its own name, with member states' contributions to the budget effectively acting as collateral. As of this month, it had outstanding loans of 56 billion euros ($76.5 billion), according to S&P.

(Reporting by Lincoln Feast in Sydney; Editing by Noah Barkin)

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