DBRS Confirms the European Union at AAA Stable Trend Following UK Vote

DBRS Ratings Limited has today confirmed the long-term issuer rating of the European Union at AAA and the short-term issuer-rating at R-1 (high). The trend on both ratings remains Stable. (See “DBRS Confirms the EU, EIB and EIF at AAA Following UK Referendum on EU”).

The majority of British voted to leave the European Union in a referendum held on 23rd June. The outcome opens a period of significant political uncertainty in Europe. Moreover, the vote to leave the EU is likely to cast doubt on the UK’s commitment to support the EU budget and obligations in the near future.

The Stable trend reflects DBRS’s view that EU is well-positioned to manage near-term risks, despite the outcome of the UK’s referendum. DBRS rates the EU at AAA primarily on the basis of its Support Assessment, which is underpinned by the overall credit quality of its core shareholders (as defined by DBRS’ methodology “Rating Supranational Institutions” published in March 2016) and the credibility of their commitment to support the EU. The ratings also benefit from the EU’s conservative budgetary management, with multiple arrangements that protect creditors, as well as the institution’s de facto preferred creditor status.

However, the EU is reliant on a smaller group of core shareholders. The uncertainty around the UK withdrawal agreement raises doubts about the UK’s near-term commitment to the EU. Consequently, DBRS takes the conservative assumption to exclude the UK from the core shareholder group for the time being. With the exclusion of the UK (AAA, Stable), the weighted median rating of the core shareholder group – composed of the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Stable), the Republic of Italy (A low, Stable) – is still AAA. These three core members account for nearly one half of all contributions to the EU.

RATING DRIVERS
The key rating driver is the strong continued political commitment of the member states to the EU, which provide the EU with multiple sources of support. The EU’s ratings could be lowered if the ratings of one or more core shareholders are downgraded. The rating could also face downward pressure if other member states were to exit the EU, thereby increasing concerns about the cohesion and political commitment of the core shareholders to the EU.

As defined in EU Regulation 462/2013, amending Regulation 1060/2009 on credit rating agencies, DBRS’s ratings on European Union are subject to certain publication restrictions, as set out in Article 8a of the Regulation, including publication in accordance with a pre-established calendar (see "2016 Planned Publication Calendar for EU Sovereign Rating Reports,” published 23 December 2015). Under Article 8a, deviation of the publication of sovereign ratings from the calendar must be accompanied by a detailed explanation of the reasons for the deviation. While the next scheduled publication date for our ratings on the European Union is 16 December 2016, the deviation has been caused by the outcome of the referendum held in the UK on the 23rd of June and the implications on the EU ratings.

Notes:
All figures are in (EUR) unless otherwise noted.

The principal applicable methodologies are Rating Supranational Institutions and Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include European Commission, Ameco, Eurostat, IMF WEO April 2016, Bloomberg, Haver Analytics, and DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Carlo Capuano, Assistant Vice President
Rating Committee Chair: Alan G. Reid,
Group Managing Director – Financial Institutions and Sovereign Group
Initial Rating Date: 11 July 2014
Last Rating Date: 17 June 2016

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