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Credit rating agency Standard and Poor’s has cut their rating for the European Union’s debt from AA+ to AA.
The agency cited the United Kingdom’s decision to exit the organization and a possible cascading effect from the vote as the primary reasons for the downgrade.
“As a consequence of the decision by the U.K. electorate to leave the EU following the June 23 referendum, we have reassessed our previously favorable opinion of solidarity within the EU to neutral from positive,” said a release from S&P.
“Our baseline scenario was previously that all 28 member states would remain inside the EU. While we expect the remaining 27 members to reaffirm their commitment to the union, we think the U.K.’s departure will inevitably require new and complicated negotiations on the next seven-year budgetary framework, known as the Multi-annual Financial Framework (MFF), from 2021-2027.”
The possibility of exits and new complications arising from the UK’s decision to leave raise uncertainty for the EU’s future and that heightened uncertainty made it difficult for S&P to feel confident in the supranational organization’s ability to pay its debt long-term.
Additionally, the agency said that the future of the EU’s fiscal stability is reliant on the 10 largest members, who are net payers into the organization. Based on more uncertainty about future income for these nations, S&P felt the downgrade was necessary.
The move comes three days after the rating agency cut the outlook for the UK’s debt as well. This move also acted as a domino in Thursday’s downgrade.
“On June 27, 2016, we lowered the rating on the second-largest net contributor to the EU budget–the U.K.–to ‘AA’ from ‘AAA’ following the U.K. electorate’s decision to leave the EU,” said the release.
“That departure will also complicate budgetary and policy priorities among the 27 remaining members of the EU, in our opinion, weakening the EU’s fiscal flexibility and introducing uncertainty into budgetary forecasts.”
S&P issued a stable outlook going forward for the rating.