04.09.2012

By Simon Miller

Moody's Investors Service has downgraded the European Union's credit outlook to negative.

Although maintaining its Aaa rating, Moody's said the change reflected the negative outlooks now assigned to the Aaa ratings of the key EU contributors.

Germany, France, UK and Netherlands account for around 45% of the EU budget and Moody's said that "it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states".

It added: "In particular, in the event of a scenario of extreme stress in which Aaa-rated member states would default on their debt obligations, 1) defaults on the loans that back the EU debt would be highly likely, 2) the EU's cash reserve would likely be stressed, and 3) the EU member states would likely not prioritise their commitment to backstop the EU debt obligations over the service of their own debt obligations."

The ratings agency added that the Aaa rating was unchanged because of the EU;s conservative budget management and the creditworthiness and support provided by its 27 member states.