EU loses AAA rating from S&P. Is it justified?

Read few comments.

Norman Schürhoff, Professor of Finance, Swiss Finance Institute Senior Chair, University of Lausanne

Credit ratings on sovereign countries, and the EU even more so, are conceptually somewhat different from credit ratings on corporations. For corporations it is their financial viability, that means their solvency and to a lesser extent their liquidity, which determine credit worthiness. This is true as well for sovereigns. From this perspective, many EU member countries have already lost their impeccable AAA status. So it is not surprising the EU as a composite of its members would lose it at some point. But for sovereigns the political economy is an additional element affecting credit ratings. This means the rating of the EU is not necessarily just the average rating of its members. The long-term viability of a political construct like the EU hinges a lot on cohesion and integration of legal, political, tax, pension, healthcare, banking, and other systems. And it requires an efficient mechanism for its own organization and for coordination with the members. Maybe the EU rating cut is more of a sign that Europe still has work to do in these directions.

Jonathan Portes, Director, National Institute of Economic and Social Research

There is much to criticise in the EU’s handling of the crisis,  in particular the mistaken insistence on premature fiscal consolidation.  However S&P’s downgrade is meaningless and irrelevant.  The credit rating agencies approach to sovereign debt is economically illiterate.  They can and should be ignored.

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