Credit Rating Downgrade Puts EU on Par With U.S.

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The United States has lived with a Standard & Poor’s AA+ long-term credit rating for more than two years. That ratings cut was driven by the first threat of a U.S. default on its sovereign debt in August 2011. Because that threat has never been completely eliminated, S&P has not upgraded to U.S. credit to its pre-2011 AAA rating. The rating was unaffected by the bipartisan budget deal that passed the U.S. House of Representatives.

Now the ratings agency has cut the European Union’s long-term credit rating from AAA to AA+ as well. At the same time S&P also affirmed its A-1+ short-term rating and said the EU’s outlook was stable.

In its action announced Friday morning, S&P said the downgrade reflects its view that the overall creditworthiness of the 28 EU member states is weaker, and that its financial profile has “deteriorated” and “cohesion among EU members has lessened.” In other words, there now exists in the EU the same conditions that led to the downgrade of U.S. credit, so S&P decided to rate its debt equally with that of the United States.

Just six of the 28 EU members still have AAA ratings, and their proportional contribution to EU revenues has fallen to 31.6%, about half the contribution of AAA-rated countries in 2007. The average GDP-weighted rating of the EU countries has dropped to between A+ and AA+ in the same time period.

S&P notes that the EU’s outstanding debt as of this month is €56 billion (about $76 billion), and that 80% of that debt is held by Ireland and Portugal. The ratings firm also said that the risk of the EU being unable to access capital markets is “remote.”

Although the EU debt level is literally a drop in the bucket compared with U.S. debt, the reluctance of the richer states to help the poorer ones is similar to the debate in the U.S. over how best to deal with a slowly growing economy — cut spending or raise revenues (taxes). And the EU’s determination to pay its debts is just as shaky as the U.S.’s. This has been true for a long time, and it is about time that S&P noticed.

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