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S&P downgrades EU debt, Commission hits back

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(BRUSSELS) - The Standard and Poor's ratings agency downgraded the European Union's credit-worthiness by one notch on Friday, blaming threats to cohesion including Britain's role in curtailing budgets and holding a membership referendum.

But Brussels angrily slapped down the agency's decision to slash its long-term debt rating from "AAA" to "AA+", saying the grounds cited were "questionable". S&P made the announcement just as the EU leaders were holding a summit marking a big political step forward with an agreement on a banking union intended eventually to ring-fence failing banks from bringing down an entire economy as happened in Ireland.

The ensuing crisis forced the bloc to step in with billions in funds to bail out entire economies, putting national budgets under constraints and exposing an endemic debt problem in some countries such as France and Italy.

Explaining its decision, the agency said: "In our view, the EU budgetary negotiations have become more contentious signalling what we consider to be rising risks to the support of the EU from some member states." "The downgrade reflects our view of the overall weaker creditworthiness of the EU's member states.

We believe the financial profile of the EU has deteriorated, and that cohesion among the EU members has lessened." Brussels disputed S&P's action, saying the EU's credit-worthiness should be assessed on its "own merit" as the bloc's budget benefits from a special treaty status and runs neither a deficit nor debt.

Member states are also bound to "always balance the EU budget", EU Economic Affairs Commissioner Olli Rehn said.

"The Commission disagrees with S&P that member state obligations to the budget in a stress scenario are questionable. All member states have always and also throughout the financial crisis provided their expected contributions to the budget in full and in time," he said.

Dilution of AAA-backed funding for the EU Since the S&P put a negative outlook on the EU in January 2012, it has downgraded ratings for a number of members and in November cut the "AAA" of the Netherlands, leaving just the six EU countries with top ratings.

The agency said that the EU had made outstanding loans of 56 billion euros, and the average life of the loans was likely to rise from 12.5 years to 19.5 years, with Ireland and Portugal accounting for 80pc of the total.

S&P said that "we believe, however, that the willingness of the remaining 'AAA' rated sovereigns to fulfil this joint and several pledge might be tested should some other members be unwilling to provide the funds on a pro-rata basis." S&P's said that the latest EU budget, approved earlier this month, had the effect of reducing sharply the room for manoeuvre within the budget ceiling.

In addition, some EU countries continued to question a special budget rebate for Britain which was set to call a referendum on the EU membership, "the first time in the EU's history that a sitting government has proposed such a step." S&P said that pressure for a further downgrade could increase if the ratings of top-quality EU countries fell more than expected, if future EU budget negotiations turned more "acrimonious", "if members apply to leave the EU, or if its financial parameters markedly deteriorate."

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