The EU's Credit Rating Takes a Hit

On August 3, the AA +credit rating of the European Union came under renewed pressure, as Standard & Poor's announced it now has a negative outlook. The news did not draw many headlines because it is about the EU as an entity and not the eurozone. The premise behind the negative outlook is interesting. One of the issues that concerns Standard & Poor's is EU countries increasingly making use of guarantees to avoid excessive large growth of government debt. This is a well-known way to keep obligations "off-balance sheet" but one day international investors will look nervously upon this trick. Moreover, one should keep in mind that the EU lost its AAA rating from Standard & Poor's in December 20, 2013. I judge the latest move from the ratings agency as remarkably quick.