Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed a monitoring review on the European Stability Mechanism (long-term foreign-currency issuer and senior unsecured debt ratings: AAA/Stable; short-term foreign-currency issuer ratings: S-1+/Stable) on 8 April 2024.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The European Stability Mechanism’s (ESM) AAA rating reflects the supranational’s substantial capital position, very high liquidity buffers, excellent capital markets access and highly rated shareholders. By March 2024, the ESM had completed one-third of its 2024 long-term funding programme of EUR 6bn, while the launch of the Euro Commercial Paper programme in February 2024 reflects the ESM’s efforts to diversify its funding instruments, adding to the existing bills and bonds traditionally issued. However, the ESM’s mandate to lend to crisis-hit countries results in a highly concentrated borrower base and weak profitability. The ESM’s shareholder base is also highly concentrated.

The Stable Outlook reflects Scope’s assessment that the ESM’s financial buffers help it withstand external and balance sheet-driven shocks, including possible changes resulting from the revised ESM treaty. Together with other reforms, the revised treaty would empower the ESM to provide loans to the Single Resolution Fund with a maximum amount of EUR 68bn to finance a bank resolution. The treaty change comes into force once ratified by all 20 ESM members, with Croatia being the newest member as of March 2023. To date, Italy remains the only ESM member not to have ratified the revised treaty, with the country’s lower house of parliament voting against ratification on 21 December 2023.

Current outstanding loans are to Greece (BBB-/Stable) of EUR 59.8bn, Spain (A-/Positive) of EUR 16.4bn, and Cyprus (BBB+/Stable) of EUR 6.3bn. The weighted average borrower quality has improved in recent years from B+ in 2016 to investment grade of BBB to date, primarily owing to the gradual improvement of Greece’s sovereign debt ratings. The ESM’s three borrowers have so far repaid in full and on time, with Spain making early repayments of EUR 17.6bn over 2014-18, before its first scheduled principal repayment in 2022, and the final repayment expected in 2027. Cyprus will start repaying in 2025 until 2031 while Greece’s scheduled repayments will take place between 2034 and 2060.

The Stable Outlook reflects Scope’s view that risks are balanced over the next 12 to 18 months. The ratings/Outlooks could be downgraded if, individually or collectively: i) liquidity buffers were significantly reduced; ii) capitalisation ratios deteriorated significantly; iii) the asset quality of the loan portfolio deteriorated significantly; and/or iv) highly rated key shareholders were downgraded.

For the updated Rating Report accompanying this review, click here.

The methodology applicable for the reviewed ratings and rating Outlooks (Supranational Rating Methodology, 3 August 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Director

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