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Investing.com -- Fitch Ratings has confirmed the Long-Term Issuer Default Ratings (IDR) of the European Union (EU) and European Atomic Energy Community (Euratom) at ’AAA’ with Stable Outlooks, according to a statement released on Friday, February 7, 2025. The entities’ Short-Term IDRs have also been affirmed at ’F1+’.
The affirmed ratings and stable outlooks are primarily influenced by the strong financial commitment of EU member states. The ’AAA’ ratings are mainly based on the ability and willingness of ’AAA’ rated member states, including Germany, Netherlands, Sweden, Denmark, and Luxembourg, to provide additional funding to the EU budget if needed to repay debt. These countries account for 36.7% of total 2025 EU gross national income (GNI) -based budget contributions.
The EU’s total debt rose to EUR601 billion at the end of 2024, up from EUR458 billion at the end of 2023, and is projected to exceed EUR900 billion by the end of 2026. Despite this, the EU’s ’AAA’ rating remains resilient due to a significant increase in resources from member states.
The EU’s loan portfolio’s average credit quality weakened to ’BBB-’ in 2024 from ’BBB’ in 2023 due to increased loan disbursements to Ukraine. Fitch anticipates the credit quality of the loan portfolio to weaken further due to additional lending to Ukraine scheduled for 2025-27.
Fitch assesses member states’ propensity to provide financial support to the EU as ’strong’. This is reinforced by the significant increase in resources that member states have recently pledged to the EU, as well as the EU’s role as the primary channel of member states’ multilateral financial support to Ukraine.
With the launch of Next (LON:NXT) Generation EU (NGEU), the EU now operates with a diversified funding strategy, combining short- and long-term funding programs and maintaining a large liquidity buffer.
Fitch expects the EU will manage debt issuance under NGEU to spread repayments as evenly as possible over the 30-year repayment period (2028-2058).
The EU’s guarantee operations have expanded in recent years as it has used them to provide development finance and mobilize private-sector capital. The long-term EU budget foresees an increase in new guarantees of EUR54 billion over the 2021-2027 multiannual financial framework.
In 2023, guarantee calls amounted to EUR127.6 million, down from EUR194.3 million in 2022. This reflects claims on guarantees in relation to operations in Syria, Lebanon, Tunisia, Ukraine, Belarus, and Russia.
Euratom’s ’AAA’ Long-Term IDR reflects Fitch’s expectation that Euratom’s debt service would be fully covered by additional contributions from ’AAA’ member states if needed.
Factors that could lead to negative rating action or a downgrade include a weaker debt coverage, weaker support from highly rated EU countries, or higher guarantee calls. The rating is at the highest level on Fitch’s scale and cannot be upgraded.
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