Press Release

Morningstar DBRS Confirms the European Stability Mechanism at AAA, Stable Trend

Supranational Institutions
July 18, 2025

DBRS Ratings GmbH (Morningstar DBRS) confirmed the European Stability Mechanism's (ESM) Long-Term Issuer Rating at AAA and Short-Term Issuer Rating at R-1 (high). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS rates the European Stability Mechanism's (ESM) on an Intrinsic Assessment (IA) and a Support Assessment (SA), which are both equivalent to AAA. The Stable trends on the long-term and short-term credit ratings reflect our view that the ESM is resilient to downside risk, including geopolitical and economic headwinds, thanks to its very high capitalization, effective and diversified funding and liquidity, and very strong and stable management.

The ESM's credit ratings are underpinned by the ESM's very strong policy mandate and capitalisation, combined with its low risk profile. The ESM's franchise strength reflects its unique public policy role within the European financial architecture, acting as the financial backstop for twenty Euro area sovereigns. Upon ratification by all member states of the ESM's amended Treaty, the ESM's role would be extended to being also the financial backstop to the European Banking Union's Single Resolution Fund. The ESM's preferred creditor status on most of its loan exposure, and effective risk management, including through its Early Warning System, also support its credit ratings.

The ESM's credit ratings also reflect its core shareholders' creditworthiness and their commitment to the institution. Despite the AA (high) weighted median core shareholders' credit rating, Morningstar DBRS considers that the ESM's Support Assessment remains at AAA. This reflects the strong credibility of the commitment of Euro area member states towards the institution combined with the additional diversification benefits stemming from AAA governments outside the core shareholder group.

CREDIT RATING DRIVERS
The credit ratings could be downgraded if a combination of the following occur: (1) there is a marked deterioration in the creditworthiness of a single core shareholder, particularly if it reflects a material weakening of the cohesion of core member states or of the strength of their political commitment to the Monetary Union; and (2) there is a substantial weakening of the ESM's Intrinsic Assessment, particularly through a substantial deterioration in its risk profile or liquidity.

CREDIT RATING RATIONALE

The ESM Plays a Unique Public Policy Mandate within the European Financial Architecture

Governed by a Treaty signed in February 2012 and established in October 2012, the ESM is the permanent crisis prevention and resolution mechanism of the Euro area. The ESM acts as the financial backstop for twenty sovereigns, accounting for close to 17% of global GDP, to safeguard the financial stability of the Euro area. Upon ratification by all member states of the ESM's amended Treaty, the ESM's role would be extended to being also the financial backstop to the European Banking Union's Single Resolution Fund. The ESM's franchise strength is also supported by its governance structure, and high-quality and stable management.

Despite Very High Loan Concentration, the ESM Benefits from a Very Strong Risk Profile and its Preferred Creditor Status

The ESM was designed to extend financing to Euro area countries under severe financial stress. As a result, credit risks on the ESM loan portfolio can be, by nature, high and concentrated. The ESM outstanding loan portfolio is currently concentrated in three member states: Greece, Spain and Cyprus. The ESM enjoys preferred creditor status on the loans provided to Cyprus and Greece, which accounted for 84.8% of its loan portfolio as of end-June 2025. That preferred creditor status comes nonetheless on a junior basis to the International Monetary Fund. The ESM has not incurred any losses on its loan portfolio since its inception and the creditworthiness of its three loan counterparties has continuously improved in recent years. All borrowers are rated Investment Grade since our upgrade of Greece in September 2023. Strict conditionality on the loans provided and the ESM's very strong risk management also support its risk profile. The ESM's Early Warning System would provide its board ample time to act, should it anticipate a potential default from a beneficiary member state on its obligations.

The ESM's Intrinsic Assessment Is Supported by its Very Strong Capitalisation

With a maximum lending capacity of EUR 500 billion, the ESM is backed by EUR 80.7 billion in paid-in capital at year-end 2024, which covered 103.5% of loans extended. With the continuous improvement of the creditworthiness of its three borrowers in recent years, Morningstar DBRS' capital-to-risk weighted stands has improved continuously and currently stands at a very high level. With another EUR 627.9 billion in committed callable capital, total subscribed capital amounts to EUR 708.5 billion.

The ESM Continues to Benefit from a Very Sound and Diversified Funding Profile

The ESM benefits from its flexible and diversified funding, and effective hedging strategy. The ESM has a Debt Issuance Program under which it issues short-term bills (generally 3-months or 6-months maturities) and long-term bonds. Since March 2024, the ESM also launched a EUR 20 billion Euro Commercial Paper Program which allows it to diversify its formats of issuances, for example with private placements, and reduce maturities of short-term issuances compared with its bills. The ESM's funding programme for 2025 stands EUR 7 billion (excluding short-term bills) and the ESM has completed 57% of its annual funding as of end-June 2025. The ESM has a very strong access to markets and benefits from a strong and diversified investor base.

The ESM is guided by prudent liquidity management practices. The ESM does not use its paid-in capital to provide loans which supports its favorable liquidity profile. Its paid-in capital and accumulated reserves are invested in three tranches with different investment characteristics, such as maturity objectives, but all invested in high credit quality assets. The ESM has also taken key steps toward environmental, social and governance (ESG) measures as an investor, through the setup of a responsible investment framework.

The Core Guarantors' Commitment to the ESM and the Additional Diversification Stemming from AAA Governments Outside the Core Guarantor Group Support the Credit Ratings

Morningstar DBRS defines the ESM's core shareholder group as the Federal Republic of Germany (AAA, Stable), the Republic of France (AA (high), Negative), the Republic of Italy (BBB (high), Positive) and the Kingdom of Spain (A (high), Stable). The ESM's Support Assessment is primarily based on the weighted median credit rating of the core shareholder group, which currently stands at AA (high), in line with France's credit ratings. The weighted median credit rating benefits however from additional support stemming from the credibility of commitments of its core shareholders and the multiple sources of support that the ESM benefits from, especially from other AAA-rated Euro area member states.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196

RATING COMMITTEE SUMMARY
The main points discussed during the Rating Committee include the ESM's risk profile and its capital and liquidity buffers, fiscal and economic developments across Euro area economies, the credit profiles of the ESM's shareholders and the credibility of their support commitment.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Supranational Institutions (23 June 2025) https://dbrs.morningstar.com/research/456695. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the ESM 2024 annual report, the ESM Investor Presentation (June 2025), the EFSF carbon footprint report (October 2024), the ESM ESG Summary Report 2024, the ESM Investor Newsletter (June 2025), the ESM homepage, and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/458978/.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mehdi Fadli, Senior Vice President, Sector Lead Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 04 April 2014
Last Rating Date: 17 January 2025

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Ratings

European Stability Mechanism
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  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
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  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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