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European Ratings: As safe as the Bank of Europe

Borrowers are wondering how European monetary union (Emu), if it happens, will affect their credit ratings.

Rating agencies Ibca, Moody's Investors Service and Standard and Poor's all intend (on different timetables) to assign a single ceiling rating to the whole of the Emu area. Given the strength of the area as a whole, this will be AAA, which will in effect become the sovereign rating. Governments will still receive ratings but these will be used purely for measuring the creditworthiness of each government's debt, not that of the whole country. As a result, all borrowers across the European Union will, in theory, be able to aspire to the AAA rating assigned to the bloc. An individual sovereign rating will no longer be a ceiling for other borrowers from that country.

This points to a fundamental shift in the way that EU governments will be assessed for ratings. At present all three agencies assign two ratings, one for domestic borrowing and one for foreign currency borrowing. After Emu, all plan to have just one rating for each country. At Ibca and Standard and Poor's the plan is to use the foreign currency rating, the reasoning being that Emu will deprive individual governments of much of their monetary authority - they will not be able to print their way out of debt, nor borrow from the central bank.

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