DBRS confirms the EU has a AAA rating and a stable trend

DBRS Ratings GmbH (Morningstar DBRS) has affirmed its European Union (EU) long-term issuer rating of AAA. Meanwhile, the DBRS affirmed the EU's short-term issuer rating at R-1 (High). The trend in all classifications is stable.

The stable trend reflects DBRS's view that Member States' commitment and capacity to support the Union should remain strong despite rising debt and geopolitical risks.

The expected material increase in EU debt to a maximum of approximately €1 trillion, as a result of the EU's temporary Next Generation Instrument (NGEU), i.e. the Recovery and Resilience Plan, is likely to lead to higher debt servicing costs in the future.

However, the increase in budget space, the commitment of member states to finance agreed spending levels, and the EU's own resource system and repayment to loan beneficiaries should comfortably allow the union to repay its debts, says the DBRS.

DBRS rates the EU primarily based on a AAA support rating. This is supported by the credibility of the EU core Member States, their strong commitment to the EU and increasing multiple sources of support, especially from AAA non-core Member States.

On the other hand, the European Union benefits from conservative budget management. Moreover, despite the significant increase in debt after the introduction of the NGEU programme, there are still several levels of debt service agreements that protect creditors and the EU has a de facto preferential creditor status, the rating agency states.

To finance the NGEU programme, EU debt is growing rapidly, but the DBRS considers the increase in fiscal space a positive, along with the commitment of Member States to provide new EU-specific resources to repay debts.

“EU debt is expected to rise to a maximum of around €1 trillion by 2026, up from around €458 billion (2.7% of EU27 gross national income -GNI-) in 2023. Total debt will finance the next generation of the Union European grants and other non-repayable resources from the Next Generation EU amounting to $421.1 billion and Recovery and Resilience Facility (RRM) loans amounting to $292.6 billion. These loans will be repaid by the loan beneficiaries. Furthermore, the ceiling will increase EU resources From 1.2% of EU GNI to 2.0% (of which 0.6 percentage points on an interim basis until 2058, for Next Generation EU) gives the EU a significant budgetary margin to meet its annual financial commitments, reads the DBRS report .