European Central Bank Ratings Affirmed At 'AAA/A-1+'; Outlook Stable

  • After the U.S. dollar, the euro is the second most widely held reserve currency, and the second most widely used to settle cross-border transactions.
  • In our view, the European Central Bank (ECB) has considerable monetary flexibility and its eurozone members have, on average, high sovereign credit ratings.
  • We are affirming our 'AAA/A-1+' ratings on the ECB.
  • The outlook is stable because we believe the ECB's high monetary flexibility and the creditworthiness of eurozone member states will remain in place at least over the next two years.
On March 27, 2020, S&P Global Ratings affirmed its unsolicited 'AAA/A-1+' long-and short-term issuer credit ratings on the European Central Bank (ECB). The outlook is stable.
S&P Global Ratings bases its ratings on the ECB on its criteria for rating monetary authorities (see "Sovereign Rating Methodology," published on Dec. 18, 2017). The criteria include:
  • Our assessment of a monetary authority's policy flexibility, as defined in our sovereign rating methodology; and
  • The GDP-weighted average rating on the sovereign members of the monetary union.
The ECB's very high monetary policy flexibility is supported by the euro's role and free-floating exchange rate regime, and the credibility and effectiveness of the central bank's monetary policy. The ECB issues the euro, the world's second-most traded reserve currency. As of the third quarter of 2019, similar to previous years, the euro made up an estimated 20% of allocated global reserves, according to IMF data. The euro has been a free-floating currency since its introduction, and we do not expect this policy to change.
In our ratings assessment on the ECB, we include the 'AA-' GDP-weighted-average sovereign rating for eurozone members and our assessment of the central bank's most creditworthy members' ability and willingness to act to maintain confidence in the euro. We consequently rate the ECB three notches higher than the GDP-weighted-average rating on its eurozone sovereign members.
We consider that the ECB has strong and explicit operational and policymaking independence, based on Article 130 of the consolidated version of the Treaty on European Union of March 30, 2010 (the Treaty). We expect the bank will successfully maintain price stability over the medium- to long-term and has been acting to this effect, not least by applying unconventional monetary policy tools. Price stability is the ECB's primary policy objective as mandated in the Treaty (Article 127) and underpins its operational independence.
The effectiveness of the ECB's monetary policy has been tested on a number of occasions since the introduction of the euro. We consider that the ECB has played a critical and effective role in containing the financial crisis that emerged in the second half of 2008. The ECB has manifested strong support throughout that eurozone economic and financial crisis by enabling the absorption of balance-of-payments shocks via the Target 2 balances (the Eurosystem's payment system for the real-time gross settlement of national and cross-border transactions in euros). In September 2012, to both pursue its mandate of price stability in the euroarea as a whole, and to counteract market fragmentation, the ECB launched the Outright Monetary Transactions (OMT) program. Under this program, the ECB can make purchases of eurozone member sovereign bonds on a nonpreferred creditor basis under certain circumstances. Such purchases would be sterilized because they would be fully offset by the creation of new bank reserves on the liability side of the ECB's balance sheet. We believe that the ECB has demonstrated its ability to introduce new monetary policy tools and its strong monetary policy flexibility.
Between October 2014 and December 2018, the Eurosystem conducted net purchases of securities under one or more of the asset-purchase programs. During that phase, the monthly purchase pace averaged €60 billion from March 2015-March 2016, €80 billion from April 2016-March 2017, €60 billion from April 2017-December 2017, €30 billion from January 2018-September 2018, and €15 billion from October 2018-December 2018. The downside deviation from the "close to but below 2%" headline inflation target has led the ECB Governing Council to use a number of nontraditional monetary policy instruments since mid-2014, such as negative deposit rates, targeted long-term refinancing operations, and purchases of asset-backed securities and covered bonds.
In January 2015, the ECB announced an expansion of its eurozone-wide quantitative easing (QE) program to include public sector government and European agency bonds. Between April 2016 and March 2017, the ECB has targeted the purchase of an average of €80 billion of assets per month. In June 2016, the ECB established a new corporate sector purchase program, focusing on the investment-grade euro-denominated bonds issued by nonbank corporations established in the euro area. At the same time, in June 2016, the ECB started new, targeted longer-term refinancing operations with a four-year maturity and the possibility of repayment after two years, which ended about two years ago.
Since January 2018, the combined monthly purchases under the expanded asset purchase program were reduced to a monthly amount of €30 billion from €60 billion previously and in December 2018, the ECB brought the QE to an end, stopping its bond-buying program. Nevertheless, the principal payments from maturing securities purchased under the program are reinvested with a monthly pace of €20 billion for an extended period of time past the date when the ECB starts raising the key interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
In September 2019, the ECB decided to restart its QE scheme, purchasing €20 billion of bonds monthly from November on. Moreover, in March 2019 the ECB decided to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) starting in September 2019 and ending in March 2021, each with a maturity of two years. We believe this will contribute both to favorable liquidity and bank lending conditions and to an appropriate monetary policy stance.
Following the novel coronavirus spread that started in early 2020, the ECB announced further easing measures. At the latest governing council meeting in March, the ECB decided on a set of measures mainly tailored to support the liquidity of the financial system. These include:
  • Additional longer-term refinancing operations.
  • From June 2020 to June 2021, there will be significantly more favorable terms applied to TLTRO-III operations and the maximum total amount has been raised.
  • Additional net asset purchases of €120 billion until year-end 2020.
  • In parallel, the Pandemic Emergency Purchase Program (PEPP) comes on top of the central bank's other purchasing programs. The flexible €750 billion program is to run until at least the end of 2020.
We view the ECB's policy response over the past few years as constructive and supportive of sovereign ratings in the eurozone and independent of political influence. The ECB's QE program did not mutualize potential losses arising from the program. Instead, about 80% of QE purchases stayed on national central banks' balance sheets (see "How Standard & Poor's Assesses The ECB's Monetary Flexibility When Rating Eurozone Sovereigns," published Feb. 11, 2015, for details on our view of QE).
In order to assign short-term ratings and to complement the credit risk assessment of the asset class for supranational monetary authorities like the ECB, we apply our "Methodology For Linking Long-Term And Short-Term Ratings," published April 7, 2017. Because supranational monetary authorities' shareholders are sovereign governments, we use the same approach as when assigning short-term ratings to sovereign issuers. This is consistent with our approach in paragraph 138 of Appendix A on Monetary Authorities in "Sovereign Rating Methodology," governing the equalization of the ratings on monetary authorities outside of monetary and currency unions with those on their respective sovereigns.
The outlook is stable because we think the factors supporting the ratings, the ECB's strong monetary flexibility and the creditworthiness of eurozone member states, will remain in place at least over the next two years.
We could consider lowering the ratings if we considered that the ECB's monetary flexibility was decreasing. This could occur under one of the following scenarios, although we do not consider these part of our base-case forecast:
  • Persistent underlying deflation;
  • The emergence of significant legal obstacles that would prevent the ECB from using its full array of monetary policy tools; or
  • An acute risk that one or more eurozone sovereigns could abandon the single currency.

We could also lower the ratings if the GDP-weighted-average sovereign rating on the eurozone members were to fall to 'A' or lower from the current 'AA-'. We do not see near-term prospects of such a decline. Currently, only Italy has a negative rating outlook.
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